In both the 2023 Autumn Statement and the 2024 Spring Budget, the previous Conservative Government announced cuts to national insurance rates. 

Having confirmed its support for the 2024 Spring Budget’s national insurance rate cuts, it was perhaps unsurprising that Labour’s election manifesto appeared to rule out any increases to national insurance rates. However, claims by various Government ministers in recent weeks that this manifesto pledge applied only to “working people”, and not to their employers, sparked speculation that employers’ national insurance contributions might be targeted.

These pre-Budget rumours proved to be accurate - although no changes were made to employee national insurance rates, employers’ class 1 national insurance rates are to rise from 13.8% to 15% from 6 April 2025. The threshold for such contributions will also fall from £9,100 to £5,000 per annum, with such threshold applying from 6 April 2025 until 5 April 2028 (at which point the threshold will start to increase again in line with the Consumer Price Index).

Labour’s election manifesto confirmed that “the basic, higher, or additional rates of income tax” would not be increased.

Today’s Budget did not break this promise, with no increases to the headline rates of income tax announced. This means that income tax rates for the 2025/26 tax year will remain at 20% (basic rate), 40% (higher rate) and 45% (additional rate). Dividend tax rates will also remain at 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate).

In the 2022 Autumn Statement, the then-Chancellor, Jeremy Hunt, announced the freezing or reduction of certain income tax thresholds and allowances, with such measures expected to remain in place until April 2028. In recent weeks, there had been speculation that Rachel Reeves would extend such “stealth tax” measures further; however, although she acknowledged in her speech that this had been an option under consideration, she decided against doing so. This means that:

• the income tax personal allowance (the amount of income an individual can receive free of tax – tapered for individuals with income above £100,000 and not available for non-UK domiciled individuals claiming the remittance basis of taxation) is fixed at its current level of £12,570 until April 2028;
• the higher rate threshold (the level of income above which the higher rate of 40% is charged – currently £37,700 plus the personal allowance, if available) is also fixed at its current level until April 2028;
• the additional rate threshold (the level of income at which the 45% rate starts to apply) remains at £125,140; and
• the dividend allowance (the tax-free allowance for dividend income) remains at £500.

Labour’s election manifesto pledged to “support local authorities by funding additional planning officers, through increasing the rate of the stamp duty surcharge paid by non-UK residents”. Although this specific measure was not included in today’s Budget, SDLT increases were announced for purchasers of additional dwellings and purchases by companies, with the higher SDLT rates increasing from 3% to 5% above the standard residential SDLT rates. The single rate of SDLT payable by companies and non-natural persons acquiring dwellings for more than £500,000 was also increased from 15% to 17%. Such changes apply to transactions with an effective date on or after 31 October 2024.

As discussed below, no capital gains tax changes were announced in connection with disposals of residential property (despite fears of a rise targeted at second homes and investment properties).

Finally, the 2024 Spring Budget had announced the abolition of the Furnished Holidays Lets regime, with effect from April 2025. Today’s Budget confirmed this measure, with draft legislation published. Under the current regime, furnished holiday lettings are treated as a trade and so property owners are able to claim deductions, capital allowances and capital gains tax reliefs which would not be available to property investment businesses. However, from April 2025, these benefits will be lost.

Rates

A rise in the rate of capital gains tax was widely seen as inevitable. In addition to the Chancellor’s limited scope for tax raising measures (for the reasons discussed above), capital gains have since 2016/17 been taxed at historically low rates: a standard rate of 10% (for basic rate taxpayers) and a higher rate of 20% (for higher and additional rate taxpayers). Higher rates have applied to disposals of residential property: a standard rate of 18% and a higher rate of 24% (28% prior to 6 April 2024).

There had been speculation in the media that capital gains tax rates might be aligned with income tax rates, meaning a top rate of 45%. This was not entirely fanciful – capital gains tax rates had previously been aligned with income tax rates by Nigel Lawson in 1988 (albeit with the benefit of indexation relief), and this continued to be the case until Alistair Darling introduced a new 18% rate in 2008 (albeit with the benefit of taper relief from 1997 through to 2008).

It was therefore no surprise to learn that the headline rates of capital gains tax are to increase. However, the received wisdom is that, since capital gains tax is to an extent an elective tax (in many cases, taxpayers have control over whether to dispose of assets), increasing rates beyond a certain level tends to decrease the total tax yield; and it seems that the Chancellor decided to pick a rate which would not risk changing taxpayers’ behaviour.  For disposals on or after 30 October 2024 a standard rate of 18% and a higher rate of 24% now applies. As mentioned in our “Property taxes” section above, there is no separate increase in the rate applicable to residential property – so disposals of residential property are now taxed at the same rates as other assets. (Carried interest alone will be taxable at higher rates – see our “Carried interest” section below on this point.)

Benefits of a capital nature received from certain offshore trusts are subject to capital gains tax when “matched” to capital gains realised by the trustees. Where gains are not matched within the first two tax years after they arise, a supplemental charge arises (of 10% per annum) which reaches a maximum after six years. Prior to the Budget the maximum charge (including the supplement) was 32%. This will now be 38.4%.

The draft legislation includes transitional provisions which (among other things) address some of the complexities which would otherwise arise where capital gains tax rates are changed in the middle of a tax year (as opposed to with effect from 6 April).

Reliefs

The Budget also included announcements concerning Business Asset Disposal Relief (BADR) and Investors’ Relief. BADR reduces the capital gains tax rate on disposals of business assets (including shares in a trading company, where the disponor is an employee and certain other conditions are fulfilled) to 10%. The relief is subject to a lifetime cap of £1m of gains.

Investors’ Relief applies to unlisted shares in an unquoted trading company, provided a number of conditions are fulfilled. It is not usually available where the disponor (or anyone connected with them) is an employee of the company in question, so does not overlap with BADR. Like BADR, it reduces the capital gains tax rate to 10%; but it has hitherto been subject to a more generous lifetime cap of £10m.

From 6 April 2025 the rate of tax where BADR or Investors’ Relief applies will be increased to 14%, and from 6 April 2026 it will be increased to 18%. The lifetime cap for BADR remains unchanged, but the lifetime cap for Investors’ Relief is reduced to £1m for disposals on or after 30 October 2024.

Where adverse changes to capital gains tax rates or reliefs have been anticipated in the past, some taxpayers have entered into arrangements intended to “bank” the capital gains tax treatment prior to the change. Such arrangements tended to involve the use of unconditional contracts, entered into with a trust or a company connected with the taxpayer. The draft legislation introducing the rate rise and the changes to BADR and Investors’ Relief includes extensive anti-forestalling rules to counteract planning of this sort.

There had been widespread speculation about changes to the inheritance tax regime in the last few weeks before the Budget. This included rumours of a change to the current rules for lifetime gifts, where inheritance tax is not chargeable provided the donor survives the gift by seven years (with a tapered rate of tax applying if the donor dies between three and seven years after the gift) – the “potentially exempt transfer” regime.

There were also strong rumours of changes to Business Property Relief (BPR) and Agricultural Property Relief (APR). These reliefs in their current form provide 100% relief from inheritance tax in respect of trading assets (including shares in unquoted trading companies) and agricultural property. However, there is an important policy reason for the availability of these reliefs: having to realise funds to pay tax at 40% on a death would in many cases have an adverse effect on trading businesses: affecting not only the deceased’s heirs but also the business’ employees and the economy more generally. The potential adverse implications of denying or reducing the availability of APR to working farmers are also obvious.

Finally, commentary also focussed on the possibility of the Chancellor seeking to tax unused pension pots on death.

What has not changed

In the event the Chancellor did not announce any changes to the potentially exempt transfer regime. She elected to freeze the inheritance tax nil rate band (currently £325,000) and residence nil rate band (currently £175,000) until the end of the 2029/30 tax year. This was perhaps no great surprise, as both were already fixed until 2027/28 in any event; and the nil rate band has not increased since 2009/10.

BPR and APR

However, she did announce significant changes to BPR and APR which will apply from 6 April 2026. From that date onwards individuals will only qualify for 100% BPR or APR up to a combined limit (for both reliefs) of £1m. Any value over and above the £1m cap will qualify for relief at a lower rate of 50%. Where an individual has a combination of assets worth more than £1m which qualify for APR and BPR the relief will be applied rateably across the assets; so if an individual dies with agricultural property worth £3m and business property worth £2m, £600,000 of the value of the agricultural property will be relieved at 100% and £400,000 of the business property.

So far only a policy paper is available. There is no draft legislation; and the detail of the changes will be subject to consultation. However, the policy paper states that the new rules will apply to lifetime transfers made on or after 30 October 2024 where the donor dies after 6 April 2026. So if the donor dies after 6 April 2026 relief will only be available at the new, reduced rates even though the gift was made prior to implementation of the new rules. Although there may still be advantages to making gifts of relievable property prior to 6 April 2026 – particularly gifts into trusts – the impact of this aspect of the changes will need to be borne in mind.

The newly restricted reliefs will also apply to trustees. For trustees subject to the “relevant property regime” (which imposes charges at a rate of up to 6% on each 10-year anniversary of the establishment of the trust, with proportionate charges if assets are distributed between anniversaries) it seems that there will also be a £1m “cap” on both reliefs on each 10-year anniversary, with 50% relief available above that level (so a reduced tax rate of 3%). Although the policy paper does not expressly state that trustees will benefit from 50% relief on value above the £1m cap, we assume this is intended.

Although a tax rate of 3% every 10 years on value in excess of £1m may sound more appealing than the 20% rate which would apply on a death, the implications for trustees holding business or agricultural assets are significant. Where (for instance) trustees hold shares in a trading company as their sole asset, there may be no options for funding the charge other than taking a dividend from the company – which will be taxable in their hands at 39.35%. This increases the overall tax payable to around 5%; not far off the 6% rate which would apply if no relief were available at all.

An additional change to the scope of BPR was announced. As discussed above, the relief applies to shares in unquoted trading companies. For these purposes, shares will still be “unquoted” if they are listed on a stock exchange which is not designated as a “recognised” stock exchange (see here for a list of exchanges which are “recognised”: Recognised stock exchanges: definition, legislation and tables of recognised exchanges). The Alternative Investment Market (or AIM) is not a “recognised” exchange; so holding a portfolio of shares quoted on AIM has been a long standing estate planning technique, particularly for UK resident and domiciled clients who may have few other options.

With effect from 6 April 2026 relief on shares in trading companies not listed on a recognised stock exchange will qualify for 50% relief only (and without the £1m allowance). It seems that this is intended only to catch shares which are listed, even if on an exchange which is not “recognised” – so the £1m allowance should still be available for shares in privately held trading companies – although the discussion paper does not say this in terms.

There will be a number of points of detail to be considered when the legislation is drafted; and as mentioned above there is to be a consultation (the discussion paper states this is to take place in early 2025). There will be time for individuals and trustees to consider the detail and to plan; but in many cases long established plans will need to be revisited.

Pensions

The Chancellor announced that measures will be introduced to tax “unused” pension funds on death, as well as death benefits payable from pension schemes.

At present, funds accumulated within a pension scheme (and not used to provide a pension to the contributor during their lifetime) generally pass free of inheritance tax on death. A 55% charge which previously applied to unused pension funds on death was removed in 2015; and the abolition of the Lifetime Allowance in 2023 removed the cap on the amount of relievable pension savings individuals can accumulate during their lifetime.

From 6 April 2027 residual funds held within a registered pension scheme (including a SIPP) will be subject to inheritance tax on the contributor’s death. Draft legislation is not yet available (there is a consultation document, and the consultation will run until 22 January 2025). The proposal is to make the pension scheme administrators responsible for reporting and paying the tax due, with a residual liability for the beneficiaries of the deceased contributor’s estate if the tax is not paid within 12 months of death.

This is clearly a significant change for clients who have built up significant pension pots – particularly if they have ample other means to cover their lifetime financial requirements and had therefore considered their pensions as primarily an estate planning tool.

Abolition of the remittance basis

UK resident taxpayers may no longer claim the remittance basis of tax with effect from 6 April 2025. However, UK taxpayers who previously claimed the remittance basis will still be subject to tax on the remittance basis in relation to any unremitted foreign income and capital gains.

The Four-Year FIG Regime

Replacing the remittance basis will be a new regime for those who have not been UK tax resident in the 10 years immediately preceding their current period of UK residence.  The new regime provides 100% tax relief on certain categories of foreign income and foreign chargeable gains (known as “FIG”).  It will apply for four consecutive tax years beginning with the first UK resident tax year and is called the “Four-Year FIG Regime”. 

The categories of FIG that are eligible for relief generally conform to those that qualified for the remittance basis. However, profits of a foreign partnership will only be considered foreign if the taxpayer carries out all partnership duties outside the UK. In addition, relief will not apply to foreign income and gains that are still taxable on the remittance basis (having arisen during a historic period of UK residence) and are then remitted during the four-year period. 

Special rules will apply to benefits received from non-UK trusts. Generally speaking, the Four-Year FIG Regime will prevent a taxpayer from being subject to tax on benefits received from non-UK trusts during the four-year period. However, the benefits will not be treated as matched to FIG and so will not reduce the relevant tax pools of the trust. 

The Four-Year FIG Regime will not apply automatically and will need to be claimed in a taxpayer’s tax return. The Four-Year FIG Regime will also come with a compliance burden; taxpayers will need to quantify the amount of FIG that is relievable under the Four-Year FIG Regime and include these amounts in their tax returns. Failure to do so will mean that the taxpayer will not benefit from the Four-Year FIG Regime in that tax year.

The Four-Year FIG Regime will be available to UK nationals and former UK domiciled individuals provided that they have been non-UK resident for at least 10 years.

Overseas Workday Relief

Overseas Workday Relief will be extended to four years and further aligned with the Four-Year FIG Regime so that employment income that is relievable under Overseas Workday Relief can be received in, or brought to, the UK without charge. However, OWR will be subject to an annual limit of the lower of 30% of the qualifying employment income or £300,000.

Temporary Repatriation Facility

A “Temporary Repatriation Facility” (or “TRF”) will be introduced for individuals who have claimed the remittance basis. A special rate of tax will apply to the designated amount, being 12% in the tax years 2025/26 and 2026/27 and rising to 15% in the 2027/28 tax year (after which the TRF will no longer be available). Where a TRF charge is paid, no further tax will be payable in relation to the designated amount. 

The amounts designated need not be remitted to the UK. Because the TRF simply applies a flat rate to the amount designated, this will allow taxpayers to designate amounts without quantifying any underlying FIG. So, for example, where a taxpayer has a mixed fund of clean capital and remittance basis FIG the taxpayer could designate the entire fund, pay the TRF charge on the value of the fund (including the clean capital), and then remit the fund to the UK without further charge.

The TRF will also be available in relation to FIG matched to benefits received from non-UK structures between 6 April 2025 and 5 April 2028. However, this relief is restricted to benefits that are matched to FIG that arose before 6 April 2025. It does not apply to income distributions received from non-UK trusts from 6 April 2025 (since such distributions are treated as receipts of current year income).

Rebasing to 5 April 2017

For capital gains tax purposes, there is a limited rebasing opportunity. This applies to anybody who has claimed the remittance basis between 6 April 2017 and 5 April 2025 and was not UK domiciled or deemed domiciled before 6 April 2025. Qualifying individuals can elect to rebase certain personally held foreign assets to their market value as at 5 April 2017. Rebasing is only available for assets (i) owned on 5 April 2017, (ii) that were situated outside of the UK between 6 March 2024 and 5 April 2025 (subject to certain exceptions) and (iii) that are disposed of on or after 6 April 2025.

Business Investment Relief

Business Investment Relief will remain available until 6 April 2028 provided that the FIG invested arose before 6 April 2025. FIG that has been used to make a qualifying investment can be designated under the TRF.

Inheritance tax

UK assets are always within the scope of UK inheritance tax. Liability to inheritance tax in respect of non-UK assets is currently based on domicile but with the individual being deemed to be domiciled in the UK once they have lived here for 15 years.

From 6 April 2025, domicile will no longer be a connecting factor and will be replaced by the concept of a long-term resident. An individual will be a long-term resident once they have lived in the UK for 10 years in a 20-year period. From year 11 they will be subject to inheritance tax on their worldwide assets even if they are not UK resident in year 11. In effect, this means that an individual will need to leave the UK before the end of their ninth year of UK residence if they want to avoid becoming subject to worldwide inheritance tax.

Once an individual has become a long-term resident, they will remain subject to UK inheritance tax for a period of time after leaving. However, the proposal that any individual who has lived in the UK for 10 years will continue to be subject to inheritance tax on worldwide assets for 10 years after leaving has been modified so that the length of time the individual remains within the scope of inheritance tax depends on the length of time they have been resident in the UK.

The minimum period for which a long-term resident continues to be subject to UK inheritance tax on worldwide assets is three years. This corresponds with the current rule under which an individual who is deemed domiciled in the UK remains subject to worldwide UK inheritance tax for three years after leaving. 

Subject to this three-year minimum, the number of years for which an individual remains subject to worldwide UK inheritance tax corresponds to the number of years for which they have been UK resident in excess of 10 years. So, for example, if an individual has been UK resident for 15 years before leaving, they will remain subject to worldwide inheritance tax for a further five years. This is subject to a maximum period of 10 years which applies where an individual has been UK resident for 20 years or more before leaving.

The effect of the changes is that overseas individuals who are resident in the UK will become subject to worldwide inheritance tax sooner than is the case under the present rules (10 years instead of 15 years). However, there is good news for UK domiciled individuals who have been (or become) non-UK resident for at least 10 years as they will then cease to be subject to worldwide UK inheritance tax even if they remain UK domiciled.

There are transitional rules which will protect individuals from worldwide inheritance tax if they cease to be UK resident before the new rules come into effect on 6 April 2025 as long as they are neither domiciled nor deemed domiciled in the UK. Individuals who become non-UK resident before the new rules take effect but who are deemed domiciled when they left will only remain subject to UK inheritance tax on a worldwide basis for three years irrespective of how many years they had been resident in the UK before leaving.

As far as the inheritance tax treatment of trusts is concerned, the question as to whether non-UK assets held in a trust are within the scope of UK inheritance tax will depend primarily on whether the settlor is a long-term resident at the time the relevant inheritance tax event occurs or, if the settlor has died, whether the settlor was a long-term resident at the date of their death.

This means that assets in a trust will move in and out of the scope of worldwide inheritance tax in the same way as assets owned by the settlor personally. So, if a settlor is a long-term resident, the trust assets will be within the scope of inheritance tax. If the settlor ceases to be a long-term resident, any non-UK assets in the trust will cease to be within the scope of UK inheritance tax. 

One point to note is that, in most cases, there will be an inheritance tax charge when the settlor ceases to be a long-term resident. The tax liability will be a maximum of 6% with the exact rate depending on how long it has been since the last 10-year anniversary of the creation of the trust.

There are some transitional provisions for assets held in trusts established before 30 October 2024.

• If the settlor has died before the new rules take effect on 6 April 2025, liability to inheritance tax for non-UK assets comprised in the trust will depend on the existing rules. This means that if the trust assets are currently outside the scope of UK inheritance tax, that will remain the case even when the new rules come into effect.
• For assets already in trust on 30 October 2024 where the settlor is still alive and which are currently outside the scope of inheritance tax, these assets will continue to be protected from inheritance tax on the settlor’s death.
  However, if the settlor is (or becomes) a long-term resident, the non-UK assets of the trust will not be protected from the inheritance tax charges which arise under the relevant property regime. This imposes a tax charge at a maximum rate of 6% on each 10-year anniversary of the trust and a corresponding proportionate tax charge where assets cease to be comprised in the trust between 10-year anniversaries. As mentioned above, there will also be an inheritance tax charge if the settlor ceases to be a long-term resident.

The protection from inheritance tax on the settlor’s death will be welcomed by many who are deemed domiciled in the UK and have existing trusts. Long-term residents will have to consider whether the prospect of paying a maximum of 6% every 10 years is an acceptable price to pay for this.

For quite some time, the Labour Party have been clear about their intention to introduce VAT on private school fees, as well as ending business rates relief for these schools, to raise funds for investment in state schools. This intention was confirmed in Labour’s election manifesto and, following the General Election, a technical note on both these reforms, consulting with stakeholders (until mid-September), plus draft legislation on the VAT policy change, was released. Today’s Budget confirmed that the Government will be proceeding with implementing these changes, and the consultation response and amended draft legislation relating to the VAT changes have been published.

The VAT proposals will technically be effective from Budget-day (30 October 2024), although the legislation itself will be included in the next Finance Bill and apply to school terms which start on or after 1 January 2025. This means that any fees paid from 30 October 2024 onwards in relation to the applicable period will be subject to VAT on payment. Additionally, anti-forestalling measures apply to capture pre-payments of fees made from 29 July 2024. The business rates changes will be legislated for separately and are anticipated to take effect from April 2025.

The existing 28% rate of capital gains tax on carried interest will be replaced with a 32% capital gains tax rate from 6 April 2025.

The Government has said that it will then consult on a wider package of policy changes to be introduced from 6 April 2026. These will include that carried interest will be brought within the scope of income tax from the start of the 2026/27 tax year – though with a bespoke effective rate of tax expected to be just over 34%. 

Amounts which qualify for this new carried interest regime will be treated as deemed trading income (similar to the existing rules on Disguised Investment Management Fees), but with only 72.5% of the amounts actually being taxed. This 72.5% amount will also be subject to Class 4 national insurance charges, reflecting its nature as profit of a deemed self-employment. The effective rate of tax will depend on an individual’s specific circumstances, but based on today’s announcements it appears that an additional rate taxpayer otherwise subject to income tax and national insurance at a combined rate of 47% would pay in the region of 34%.    

The Government also intends to tighten up the rules on what qualifies as “carried interest”. The existing average holding period requirement (which is applied at fund level and is known as the Income-Based Carried Interest (IBCI) regime) is set to remain, but the safe harbour for carried interest awarded in connection with an individual’s employment will be abolished. Further conditions for accessing the new regime may be introduced following the consultation process. For example, the Government is considering a minimum co-investment condition and a minimum holding period requirement, which would look at the time gap between the award of carried interest rights and receipt of the carried interest itself. 

Amounts that do not qualify as carried interest will continue to be taxed as income under the Disguised Investment Management Fee (DIMF) rules, without the benefit of the new computational rules.    

As is often the case, the Chancellor intends to raise additional revenue (£6.5bn by 2029-30) through closing the tax gap (the difference between the tax due and the tax paid). Measures to achieve this include recruiting an additional 5,000 compliance staff, 1,800 debt management staff and modernising IT and data systems. The Government also plans to increase the interest rate charged by HMRC on unpaid tax liabilities by a further 1.5% from 6 April 2025. 

There is also a focus on “offshore” matters. The Government is proceeding with a reform of the UK tax anti-avoidance rules aimed at non-UK structures (including those aimed at non-UK trust and corporate structures affected by the non-dom changes discussed above). This process is in its early days and the Government has published a call for evidence on how these rules could be reformed. The changes will not apply before 6 April 2026. HMRC will also be scaling up activities aimed at offshore non-compliance by disrupting offshore intermediaries and improving data collection.