Techzone

Rachel Reeves' first Budget as Chancellor has had the rumour mill in overdrive as she strives to fill a blackhole in the public finances. The biggest single measure designed to address that blackhole was a 1.2% increase in the rate employer NICs.

Many of the rumoured changes, such as a return of the LTA and a cap on pensions tax-free cash failed to materialise which is good news for advisers and their clients. However, there are a number of tax raising measures which advisers will need to be aware of.

Read our summary of the key points affecting advice.

Pensions and IHT

There were strong rumours that we could see a change to the tax treatment of pension death benefits in the Budget and this has materialised. From 6 April 2027, most pension death benefits will be included in the estate for IHT purposes.

The Government has opened a consultation on the processes required to implement the changes. Responses must be in by 22 January 2025.

The aim is that on death, the pension scheme administrator (PSA) and the personal representatives (PR) of the estate will liaise, and the scheme will let the PRs know the amount of death benefits payable and the beneficiaries. Any pension death benefits going to the spouse/civil partner will be covered by the spousal exemption.

The PRs will the use an HMRC calculator to apportion the nil-rate band between the different elements of the estate and they’ll let the pension scheme know of any IHT charge due on the pensions. The scheme would then pay the IHT directly to HMRC before paying out the death benefits to the relevant beneficiaries.

Any tax due under the normal pension rules, for example on lump sums exceeding the LSDBA or on all benefits on death after age 75, would be levied on the residual amount after any IHT has been paid by the scheme.

All death benefits appear to be covered by this, apart from dependants’ scheme pensions and charity lump sum death benefits.

Tax on death benefits is not new – it was only the changes in 2015 that allowed tax-free death benefits (up to the available lifetime allowance) to be paid where death occurred under age 75. While these changes are not reversing that, the inclusion of pension in the estate shows the new Government want pensions to be used for retirement provision and not wealth transfers.

Capital gains tax (CGT)

Main rates

Capital gains tax rates will increase to 18% for basic rate taxpayers and 24% for higher rate and additional rate taxpayers, up from 10% and 20% respectively.  This will happen from today, 30 October 2024. There is no change to CGT rates on residential property which continue to be taxed at 18% and 24%.

There is no change to the CGT annual exemption of £3,000 for individuals and £1,500 for trusts.

This increase will bring comparisons between bonds and collectives closer together.

Business Asset Disposal Relief (entrepreneurs relief)

This relief provides a special rate of CGT of 10% on disposals of business assets up to a lifetime allowance of £1 million.   From 6 April 2025, the rate of CGT will increase to 14% and from 6 April 2026 to 18%, on disposals up to £1 million.

Inheritance tax

Agricultural property relief and business property relief

From April 2026, only the first £1 million will get 100% relief on the combined value of qualifying agricultural and business property. For qualifying assets over £1 million, relief will be given at 50%, resulting in an effective rate of 20%.

However, shares which aren't listed on recognised stock exchange, including AIM shares, will be subject relief at 50% on the entire holding and will not count against the £1 million allowance. Advisers may need to review clients with larger holdings of AIM shares to decide whether the risk and reward equation still stacks up given this additional IHT cost.

The new rules will also apply to lifetime transfers from 30 October 2024. This means a gift of AIM shares before April 2026 will be a failed PET if the donor does not survive for seven years and relief will be resticted to 50%.

Inheritance tax: nil-rate band and residence nil-rate band

The nil rate band of £325,000 and the maximum residence nil-rate band of £175,000 will now be frozen until 5 April 2030, two years beyond the current freeze.

Tapering of residence nil rate band will continue from the £2 million threshold.

Planning options will not therefore change, but with estate values generally growing year on year, more clients will be dragged into the IHT net. Earlier planning during lifetime and ensuring that wills are properly drafted to maximise benefits from the residence nil rate band is essential.

ISAs

There are no changes to the current subscription limits. These are £20,000 for ISAs, £4,000 for Lifetime ISAs (included in the £20,000 ISA subscription limit) and £9,000 for Junior ISAs and the Child Trust Fund. These will be fixed until 5 April 2030.

The ‘British ISA’ proposed at the last budget will not go ahead.

Pre-budget rumours of a cap on accumulated ISA savings has not materialised either.

Income tax and NI for individuals

The freeze on income tax and NI thresholds will continue until 2028 as announced by the previous government, but beyond that the thresholds will increase in line with inflation.

The threshold at which child benefits are withdrawn was increased from £50,000 to £60,000 from the beginning of this tax year and this will continue. Benefits are withdrawn at the rate of £1 for every £200 in excess of the £60,000 threshold. This means all child benefits are lost once the highest earner in the household has income over £80,000. It is worth remembering that individual pension contributions are still a deduction from income used for this test. Proposals to extend this test to household income at a higher threshold will not go ahead.

National Insurance for employers

From 6 April 2025, the rate of employer NICs will increase from 13.8% to 15% and the Secondary Earnings Threshold – the point at which employers start paying NICs on an employee’s earnings – will reduce from £9,100 a year to £5,000 a year. The threshold will be frozen until 5 April 2028 and will be increased by CPI thereafter.

Currently, the Employment Allowance allows employers with NIC bills of up to £100,000 in the previous tax year to deduct £5,000 from their NIC bill. From 6 April 2025, this allowance is being increased to £10,500 and the £100,000 threshold will be removed so that all employers will be eligible for the allowance.

The Government claim that 865,000 employers will pay no NICs and that more than half of employers with NIC liabilities will either see no change or be better off following these changes.

Transfers to QROPS

The Government are closing a loophole where UK pensions are transferred overseas to a QROPS. Normally, if the transfer is being made overseas but the member is not resident in the country the transfer is going to, then there is a 25% Overseas Transfer Charge levied on the transfer value.

However, there was an exemption if the transfer was being made to a country in the EEA or to Gibraltar and the member was resident in the UK or within the EEA.

This is being withdrawn for all overseas transfers from today, 30 October 2024.

So if a transfer is being made to a QROPS in the EEA or Gibraltar, but the member remains resident in the UK, the transfer will be subject to the Overseas Transfer Charge. The Government believes this will reduce the risk of individuals receiving double tax-free allowances.

State Pensions

It was confirmed that the triple lock on State Pensions would be maintained for the remainder of this parliament, guaranteeing a 4.1% earnings-based increase in April.

This means that the full New State Pension will increase to £230.25 a week from 6 April 2025. We expect the full Basic State Pension to increase to £176.45 a week (single person) or £282.15 a week (married couples and civil partners).

The 4.1% increase will also apply to the guaranteed element of Pension Credit.

Changes to the taxation of non-UK domiciles

The Chancellor confirmed that the abolition of the remittance basis and removal of the concept of domicile for tax purposes will go ahead from the 6 April 2025. This is to be replaced with a new Foreign Income and Gains (FIG) regime which is determined by UK residency rather than domicile.

Individuals who become UK resident having been non-resident for more than 10 years will not pay UK tax on their overseas income and gains for the first four tax years of UK residence and will be free to bring these funds to the UK free of any additional tax. They will continue to pay tax on their UK income and gains in the normal way.

Currently someone who is non-UK domicile is only subject to UK IHT on assets situated in the UK. However, they become subject to IHT on their worldwide assets if they become UK domicile or deemed domicile.

From 6 April 2025, IHT will apply on worldwide assets where someone is deemed to be a long-term resident. This is typically where someone has been resident in the UK for more than 10 years in the last 20 years. Where someone ceases to be UK resident they will remain subject to IHT for up to 10 years after leaving the UK.

The IHT changes will also impact excluded property trusts with the settlor long term residence status at the time of any IHT charge rather than their domicile status at outset being the determining factor on whether IHT may be due.