Posted 3rd December 2024
Read our summary of the key points:
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 with immediate effect. 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 (IHT)
Agricultural property relief and business property relief
From April 2026, only the first £1 million will receive 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 are not listed on a recognised stock exchange, including AIM shares, will be subject to 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 restricted 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 people 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.
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.
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 pensions in the estate shows the new Government want pensions to be used for retirement provision and not wealth transfers.
If you would like to discuss any of the above, or have concerns, please get in contact with us.