After a huge amount of anticipation and speculation, yesterday’s budget was both a big one, yet from a private client perspective, far less impactful than had been anticipated / feared.
It kicked off with the news that a massive £40bn would be raised in taxes, which drew a few sharp intakes of breath. Whilst budget changes are always in the billions, this is still a huge amount. It equates to about 1.2% of GDP, which is greater than any budget since 1993.
However, the majority of this is being raised through an increase in Employer National Insurance Contributions as the government desperately maintains the pretence that increasing this literal tax on work isn’t a tax rise on “working people”.
In our pre-budget planning blog we highlighted a few potential sources of tax revenues for the government. Most of these areas saw some revenue raising measures, but they were generally at the less drastic end of what could happen.
Tax Change Announcements
We’ve set out the announced changes to the four areas highlighted in our pre-budget blog, along with a section for other (relevant) changes:
- Capital Gains Tax (CGT)
- Pensions
- Inheritance Tax (IHT)
- Fiscal Drag
- Stamp Duty
Capital Gains Tax (CGT)
The tax rise everyone knew was coming. After earlier expectations of large increases (and leaks of OBR running scenarios of 33% and 39%) the mood music gradually tempered towards more modest changes and ultimately the increase came in at the very bottom of expectations.
- Higher rate CGT is increasing by 4%, from 20% to 24%
- Basic Rate CGT is increasing by 8%, from 10% to 18%
With the surcharge on residential property being removed, this aligns rates across most assets. Trustee rates continue to mirror higher rates i.e. now 24%.
The new rates are effective immediately from disposals on or after 30th October.
The higher rates of tax will filter through to our financial forecasting moving forwards. Given the modest nature of the increase, this will have a limited impact on most plans.
Uplift on Death
There was no change announced on the treatment of capital gains on death.
A deceased’s estate will continue to acquire assets at the value on the date of death, wiping out capital gains on death.
Business Asset Disposal Relief (BADR)
The artist formerly known as Entrepreneur’s Relief survived the chop and will continue to apply on up to £1m of (lifetime) qualifying gains. However, the relieved rate will gradually be increased from 10%, in line with basic rate CGT:
- From 2025/26 the relieved rate will be 14%
- From 2026/27 the relieved rate will be 18%
As well as increasing the rate of gains payable, the reduction provided by BADR over higher rate CGT will be reduced from 10% (10% vs 20%) to 6% (18% vs 24%).
Pensions
As we anticipated there were no changes to pensions tax relief – as much revenue as it would raise, there are just too many knock-on impacts and difficulties in practice.
A strong rumour did surface a few weeks ago that employer NICs would be applied to pension contributions, but this didn’t form part of that particular tax rise.
Similarly, much feared reductions in pensions lump sums never materialised.
Death Benefits – Inheritance Tax
There was however one big announcement on pensions. We previously noted that this appeared an obvious revenue-raising option, given the generosity of previous rules and a lack of impact on the public sector.
It was announced that from April 2027, pensions will be subject to Inheritance Tax (IHT).
Planning around pensions and estate planning will need careful consideration for each individual, based on their specific circumstances. We will review pension death benefit nominations and pension drawdown strategies with all affected clients, prior to April 2027.
It appears there remains an estate planning advantage to pensions in the event of death before age 75, in that beneficiaries can draw sums without income tax, whereas a pension member will pay income tax on sums drawn (beyond tax-free entitlements). Appointments of pension death benefits to trusts on first death, as opposed to spouses will look less attractive after April 2027.
Post age 75, the relative merits of preserving pensions compared to other assets will come down income tax considerations (of both the pension member and relatives), as well as the usual gifting/legacy plans.
The proposal is for IHT to be paid directly out of pensions (a consultation will now begin with the industry, hence the April 2027 date for changes).
Inheritance Tax (IHT)
Apart from bringing pensions within the scope of IHT, other rumoured tightening of gifting rules didn’t come to pass.
The main allowances, the Nil Rate Band (£325k each) and an additional Residence Nil Rate Band (£175k each) for passing on a home will now be frozen right the way through to 2030 (previously 2028). For the former, the big freeze dates back to 2009.
We highlighted Business Relief (on private company shares/assets) and Agricultural Relief (on farming land/assets) as a potential target and these reliefs are indeed to be trimmed.
From April 2026, the reliefs will be reduced from 100% of IHT to 50% (giving an effective tax rate of 20%, compared to the full 40%). However, this reduction will only apply to assets in excess of £1m (across both reliefs), so this is not as dramatic as it could have been. Still, business owners intending to retain significant ownership after retirement will need to review the impact on their expected IHT liabilities.
Business Relief on AIM (Alternative Investment Market) Shares will be restricted to 50% on the full value i.e. they cannot benefit as part of the £1m limit.
Fiscal Drag
The Chancellor chose to reintroduce indexation for income tax bands from 2028/29, although she chose to retain their predecessor’s existing freeze through till April 2028.
Once again, Inheritance Tax (IHT) bands continue to suffer the big freeze. Unless I missed it, the annual exemption for gifts will still be soldiering on at the same £3,000 allowance since 1984.
ISA allowances will also be frozen through until 2030 (i.e. £20k for Cash and Stocks & Shares ISAs).
Stamp Duty
The Stamp Duty Land Tax (SDLT) surcharge on additional dwellings will increase from 3% to 5%. This was brought in as of today (day after the budget) – we were glad we weren’t conveyancing solicitors yesterday afternoon!
From April 2025 the total SDLT on a £300k Buy-To-Let property purchase will now be up to £20k (6.7%) and an eye-watering £40k (8%) on a £500k BTL purchase.
Concluding Comments
There will be little in these announcements that will require urgent action for our clients. In particular, the changes in Capital Gains Tax will have a modest impact.
The big changes in planning will come from pensions falling within the scope of Inheritance Tax. We will be discussing this with all affected clients at future Regular Progress Meetings.
If you would like to discuss any particular aspect of the budget and how it may affect you, please do get in touch; we’re always here to help.
Disclaimer
The above is provided for general information only. No action should be taken without seeking advice for your specific circumstances. Collingbourne Wealth Management Ltd does not provide tax advice. All information is based on our understanding of current tax rules as at the time of writing, which is subject to change.