After months of speculation and rumour, leaks and lobbying and – most perhaps damagingly – protracted uncertainty for taxpayers, the Chancellor today finally delivered the Labour party's first Budget in 14 years.  Questions over whether the government could adhere to its general election manifesto commitment not to raise taxes on 'working people' (whether income tax, national insurance contributions ('NICs') or VAT) have now finally been answered after Rachel Reeves set out her tax plans for the coming years.  

Significant tax increases were always promised and the Budget certainly did not disappoint; to the tune of an additional £40 billion of revenue. Labour had promised a Budget for business but has delivered the most significant tax increases in a generation, taxes that fall squarely on businesses and business owners.  

Given the party's self-imposed limitations on its room for fiscal manoeuvre, changes to headline rates of taxes affecting the majority of working people were, arguably, relatively minor, save for the important exception of employer's national insurance contributions.  As already trailed in the press, the Chancellor will increase the employer's NICs rate by 1.2%, to 15% from 6 April 2025.  This is less than the suggested 2% rise recently reported but nevertheless is forecast to bring in nearly £24bn in the next financial year.

Employer's NICs aside, the more radical changes to the tax system were targeted at taxes or regimes affecting wealthier individuals: namely the expected crack down on non doms (despite Rachel Reeve's repudiation of much of what Jeremy Hunt and the Conservatives had introduced), inheritance tax ('IHT') reforms, changes to capital gains tax ('CGT') rates , tax increases on carried interests from private equity, a rise in stamp duty land tax ('SDLT') surcharge for second properties, and the abolition and replacement of the remittance basis of taxation (not to mention the previously confirmed application of VAT to private school fees from 1 January 2025).  

While restrictions on inheritance tax relief for AIM listed shares and some farmland had been widely trailed before the Budget, in the end the Chancellor went significantly further introducing an effective 20% inheritance tax charge on death for businesses and farmland, which previously passed free of tax.  An exemption of £1 million (though not in respect of AIM listed shares) will soften the blow for the smallest businesses, but this will be a significant challenge to private investment in the UK.  As widely expected pensions which previously could escape tax on death will be brought within the scope of inheritance tax from 6 April 2027.

We cover these issues and a number of the ancillary announcements on tax below.

Some of these changes constitute major reforms and their consequences will be complex and take time to work through, particularly for internationally mobile individuals with complex international affairs who have already been present in the UK for some time, or who work in affected industries.  If you are concerned about how any of the Budget announcements on tax will affect you, please get in touch and we will be happy to discuss them.

Abolition of the remittance basis and introduction of the FIG regime

One of the more significant planks of the Labour party election manifesto in the area of personal taxation was its commitment to press ahead with the Conservative government's planned abolition of Non Dom regime from 6 April 2025.  Despite recent press reports that the Chancellor was reconsidering this historic move in light of fears in the Treasury that it may fail to raise any revenue as a result of affected individuals leaving the UK (or choosing not to come in the first place), Rachel Reeves confirmed today that the remittance basis would indeed end as scheduled.  In its place, the previously announced four year 'foreign income and gains' ('FIG') regime will be introduced.

The FIG regime will allow new arrivals to the UK (being individuals who have not been UK tax resident in any of the previous 10 tax years) to make a claim to be taxed (generally) only on their UK source income and gains for a period of four consecutive years.   The exact categories of non-UK income and gains which will be outside the scope of UK taxation if such a claim is made are complex, but it is worth noting at this stage that among those gains which will not be exempt from UK tax are gains realised on surrenders or part surrenders offshore life insurance policies.

While the FIG regime may be touted by the government as 'internationally competitive', many advisors to individuals affected by these changes had been advocating for a longer period of eligibility (say, up to 10 years, to align with certain other jurisdictions' beneficial tax regimes) or for a flat tax regime, whereby new UK tax residents could choose to pay a flat sum of tax each year at graduated levels depending on their level of wealth.  Clearly, the Chancellor has taken the view that the FIG regime will be sufficient to attract the top international talent to the UK who they are seeking to develop future industries and invest in the economy.  Time will only tell whether the FIG regime proves enticing enough to those individuals that they are drawn to and remain in the UK for the long term. 

Residence for inheritance tax purposes

Under the current system, non-UK domiciliaries (which, very broadly, means individuals born to non-British fathers who do not intend to remain permanently or indefinitely in the UK) who come to the UK can claim the remittance basis of taxation for up to 15 tax years of UK residence.  After that point, if the individual remains UK tax resident, they become 'deemed domiciled' in the UK.  This 'deemed domicile' has two main tax consequences: the individual loses the ability to claim the remittance basis and their worldwide estate falls within the scope of UK inheritance tax ('IHT').

Under the new rules, the centuries-old concept of domicile will be swept from the UK tax system, almost completely.  The exposure of an individual's estate will no longer depend on whether they are domiciled or deemed domiciled in the UK.  Instead, a new residence-based system will replace the domicile system.  

The residence-based system will treat an individual's estate (and, importantly, any trusts which that individual has settled) as within the scope of IHT if that individual has been UK tax resident for 10 out of the previous 20 tax years.  Such individuals are being termed 'long-term residents' for IHT purposes.  Generally speaking, long-term residents who leave the UK will no longer be subject to IHT after 10 years of non-UK tax residence.  However, for long-term residents who have been UK resident between 10-19 years, this is modified so that the 'tail' which attaches to the departing resident is shortened in proportion to their length of residence in the UK.  The shortest tail will be three years, for those resident for 10-13 years, then 4 years of tail for 14 years' residence, 5 years for 15 years' residence, and so on. For those non-doms and deemed doms who leave the UK before 6 April 2025, transitional provisions will apply but, importantly, individuals who are actually UK domiciled and leave before these rules come into force will nevertheless be subject to them for the length of the IHT tail.  It is clear from the policy paper that there will be much scope for error and, indeed, inadvertent non-compliance by individuals who have long since left the UK who do not become aware that they remain subject to IHT.

The end of protected trust status

When the concept of deemed domicile for income tax and CGT purposes was introduced in 2017, a 'sweetener' was introduced with it in the form of protected trust status.  Under this regime, any foreign income and gains arising are not taxed directly on the settlor on an arising basis, thereby having the effect of extending the settlor's access to tax deferral (effectively, the remittance basis by the back door).  Many individuals chose to take up this protection offered by the legislature to ringfence certain assets abroad, whether for a rainy day, to benefit family members outside of the UK or for other estate planning reasons.

This protection is now being taken away.  From 6 April 2025 onwards, the income and gains arising within settlor-interested trusts will be taxed on the settlor on an arising basis if they are UK tax resident and not within the FIG regime.  The test for whether a trust is settlor interested is different for income tax and capital gains tax purposes and the bottom line is that it is generally possible to prevent a trust being settlor-interested for income tax purposes but very difficult for capital gains tax purposes (unless nobody remotely connected to the settlor will ever benefit from the trust).  This will be a transformative change and will bring significant amounts of income and gains arising in offshore trusts (including those set up for example for grandchildren in a different country and with almost no connections to the UK) into the scope of UK taxation for the first time.

IHT and trusts

In addition, such trusts settled by non-dom individuals prior to becoming deemed domiciled, assuming they did not hold assets situated in the UK, were also outside of the scope of IHT during the settlor's lifetime and on death.  As already announced, the government's policy is to remove this protection. 

Assets held in most trusts settled by UK domiciliaries are subject to ongoing IHT charges, on each 10-year anniversary of the trust and when property leaves the trust (this is known as the relevant property regime).  From 6 April 2025 onwards, whether a trust is within the scope of relevant property regime charges will no longer depend on the domicile status of the settlor when the assets were settled.  Instead, it will depend on whether the settlor is a long-term resident.  This means that trusts will come in and out of the relevant property regime depending on the long-term residence position of the settlor.  Should a trust leave the relevant property regime following the settlor ceasing to be subject to IHT, there will be an 'exit charge' in respect of the trust assets (likely calculated as a proportion of 6% of the trust assets, depending on how much time has passed since the trust's last 10-year anniversary).

For many former non-UK domiciliaries, exposure to IHT on not only their estate but also on any trusts they have settled will be a difficult pill to swallow, particularly given the relative generosity of the old rules and the fact that such structures were put in place in good faith under the rules applicable at the time.  The silver lining to the changes regarding IHT on trusts is that, for non-UK trusts settled before 30 October 2024, the 'gift with reservation of benefit rules' will not apply.  This means that, even if the settlor is capable of benefitting from the trust, the trust assets will not be subject to 40% IHT on the settlor's death (but will still be subject to the ongoing anniversary and exit charges referred to above).  This will no doubt come as a relief to those individuals who have settled trusts, perhaps many years ago, and were concerned that the value of these would be liable to a 40% IHT charge on their death.

Temporary repatriation facility

The Chancellor confirmed that the proposed temporary repatriation facility ('TRF') will be implemented, and somewhat extended.  The TRF will allow former remittance basis users to bring to the UK unremitted income and gains (i.e. the accrued income and gains historically protected from UK tax by the remittance basis) for a flat 12% rate of tax.  The facility will last for three years from 6 April 2025, rather than the previously announced two years, with the rate of tax rising to 15% for remittances made in the third year.

Importantly, the policy guidance confirms that distributions to, and benefits received by, former remittance basis taxpayers from offshore trust structures during the TRF period will be capable of benefitting from the TRF, to the extent those capital distributions are matched to historic income and gains within the trust structure.  This is likely to provide an attractive restructuring opportunity for former non-domiciliaries with historic structures in place.

IHT reliefs for business and agricultural property

Prior to the Budget, it had been rumoured that the Chancellor might increase the rate of inheritance tax ('IHT'), currently at 40%, or even introduce a gift tax.  However, in recognition that 'people want to pass on their assets to their families', the headline rate of IHT remains at 40%.  Unsurprisingly, the amount that individuals can leave on their death without attracting IHT (known as the 'nil rate band'), will continue to be frozen until April 2030.  The nil rate band has been fixed at £325,000 since 6 April 2009 and would have been around £500,000 now, if it had risen with inflation. 

The Chancellor's recognition that people want to pass on assets to their families does not extend to entrepreneurs and farmers, who will feel the sting of IHT reforms.  Under current rules, certain business interests and agricultural property are relieved from IHT by either 50% or 100% (known as 'business property relief' and 'agricultural property relief').  There is currently no cap on the value of assets that can be relieved in this way.  From 6 April 2026, however, the 100% relief will be capped at £1m on the combined value of business interests and agricultural property.  Any assets that would currently enjoy 100% relief and exceed that £1m limit will receive only 50% relief, leading to an effective IHT rate on those assets of 20% (not the usual 40%).  Assets which currently benefit from only 50% relief will not be impacted by the changes.  Notably, unlisted shares (such as those traded on the Alternative Investment Market) which currently benefit from 100% relief from IHT will, going forward, only receive 50% relief, again from 6 April 2026. 

The £1m allowance and new rates will apply to lifetime gifts made on or after 30 October 2024 if the donor dies within seven years of the gift and, in other cases, on or after 6 April 2026. 

Trustees of trusts holding certain business interests and agricultural property will also be limited to a £1m allowance for assets that qualify for 100% relief.  This is relevant for IHT payable on ten-year anniversaries and when assets are distributed from the trust.

CGT

While an immediate jump in CGT rates was widely forecast, many were braced for more drastic changes, with some even speculating an alignment with income tax rates. The increase in lower and higher rates to 18% and 24% respectively for disposals made on or after 30 October 2024 marks a lighter touch than anticipated, with a freeze on CGT rates for residential property at 24% likely to be welcomed by owners of second or additional properties.

The rate for Business Asset Disposal Relief and Investors’ Relief will increase to 14% from 6 April 2025, and will increase again to match the lower main rate of CGT at 18% from 6 April 2026. The lifetime limit will be maintained at £1 million. 

Mirroring the reduction in Business Asset Disposal Relief made by the Conservative government in 2020, the lifetime limit for Investors’ Relief will be reduced from £10 million to £1 million for all qualifying disposals made on or after 30 October 2024.

Carried Interest

After a period of speculation, industry debate and lobbying by diverse groups over the taxation of carried interest (the share of profits from certain types of investment funds earned by the fund's managers), the Chancellor has announced somewhat limited reforms.  Under the current rules, carried interest is subject to CGT rather than income tax where certain conditions are met.  From April 2026, all carried interest will be taxed within the income tax framework, with a 72.5% multiplier applied to qualifying carried interest that is brought within charge.  As an interim step, the two CGT rates for carried interest will both increase to 32% from 6 April 2025.  Thereafter, assuming the additional rate of income tax remains 45%, on the basis of the 72.5% multiplier, the rate for carried interest for most carried interest recipients will be in the region of 32.5%.

The government, in recognition of complexity of fairly taxing carried interest, will undertake a technical consultation to assess further changes to the regime.

SDLT

From 31 October 2024 the Higher Rates for Additional Dwellings (HRAD) surcharge on SDLT will increase from 3% to 5%, giving those moving home or purchasing their first property an additional comparative advantage over second home buyers, landlords, and businesses purchasing residential property. This surcharge also applies to non-UK residents purchasing additional property. 

The single rate of SDLT that is charged on the purchase of dwellings costing more than £500,000 by corporate bodies will increase from 15% to 17%.

VAT on school fees

As previously had been announced, the Chancellor has confirmed that, from 1 January 2025, private school and boarding fees in the UK will be subject to VAT at the standard rate of 20%. Private schools will also be brought within the scope of business rates for the first time. 

Corporate tax roadmap and business rates

In an attempt to provide stability and predictability for businesses, the Chancellor has also published a 'Corporate Tax Roadmap'.  As part of this, the Chancellor confirmed that Corporation Tax will be locked in at 25% 'for this Parliament' – welcome news for businesses who were impacted by the 6% increase which came into effect in April 2023.The Chancellor also confirmed that the UK's capital allowance regime (a relief that allows businesses to deduct the cost of certain assets from their profits before paying tax) will be maintained, albeit the Government will explore a simplification of the legislation. The R&D Expenditure Credit scheme and the Enhanced Support for R&D Intensive SMEs will also be maintained. 

Although there was a manifesto pledge to "abolish" business rates, the Budget rather introduced a series of differential multipliers above and below the £500,000 rateable value level in relation to premises used in the retail, hospitality and leisure sector; in effect, proprietors of large retail warehouses will subsidise the remainder of the retail, leisure and hospitality sector because occupiers of large retail premises will pay higher levels of rates per pound of rateable value, while smaller shops, hotels and similar establishments will pay lower levels. Other, longer term "improvements" to business rates are also proposed.

Employee Ownership Trusts and Employee Benefit Trusts

The new government has taken up the former Conservative government's consultation into Employee Benefit Trusts ('EBT') and Employee Ownership Trusts ('EOT').  Following the consultation, the Chancellor has decided to introduce a package of reforms aimed at 'opportunities for abuse, ensuring that the regimes remain focused on encouraging employee ownership and rewarding employees'.  Whilst the tax benefits of an EOT will remain the same (transferring shares into an EOT does not give rise to CGT or IHT, EOTs are not subject to IHT and employees can receive tax free bonuses of up to £3,600 per year from the EOT), those who transfer shares into an EOT will have to have held the shares for at least two years prior to the transfer to benefit from the IHT exemption. The changes are to take effect from 30 October 2024.  

Tax crackdowns

Finally, the Autumn Budget would not be complete without a 'Tackling the Tax Gap' section and yet another government promised to shake lost revenue out of tax evaders by investing in HMRC's resources (surely by now a case of ever diminishing returns). This year's promises include bolstering HMRC's capacity and capability to address the most challenging examples of series non-compliance by enhancing its use of data such as that from the Register of Overseas Entities, and improving the Worldwide Disclosure Facility to make it easier for taxpayers to regularise their affairs.  More generally, the government has announced a package of measures to raise standards in the tax advice market, including greater scrutiny of tax practitioners operating with HMRC on clients' behalf.

Get in touch

If you would like to discuss any aspects of the Budget and how they affect your and your family's tax arrangements, please do get in touch.