Today, Rachel Reeves delivered her long-awaited maiden Budget speech. The speech began with a strong emphasis on restoring stability and driving growth and investment into the country, whilst reminding us of the well discussed ‘black holes’ to plug and tough choices on taxes to make, subjects which had led to rife speculation and rumours ahead of, in our opinion, one of the most eagerly anticipated Budget in modern times.
It was hoped that today’s Budget would provide certainty in a tax landscape that has been anything but that over the last few months. As it turned out, there were few surprises from the measures previously discussed, with changes to the non-dom regime, taxation of carried interest and VAT on school fees, amongst others, all being announced. Whilst we now have the clarity we’ve missed over the last few months, the measures announced are unlikely to be positive news for most of our clients.
This article highlights the main changes that we will affect our clients going forward.
Non-domiciled individuals
Rachel Reeves has finally provided some detail in relation to the overhaul of the non-dom regime, originally proposed in the Conservative’s Spring Budget earlier this year by Jeremy Hunt. A technical briefing has been released giving 34 pages of detail regarding how the non-dom regime will end and the transitional provisions that will apply. While this is broadly as expected, there are some variations to the proposals that were initially put forward. Refer to our article on Dramatic changes for non-doms for details of the original proposals.
· A new 4-year foreign income and gains (FIG) regime will apply (if claimed) to individuals who become UK tax resident after a period of at least 10 consecutive tax years of non-UK residence. Individuals qualifying for the FIG regime will not pay UK tax on FIG (including trust distributions and benefits) during this period, irrespective of whether these funds are brought to the UK or left offshore. FIG includes most sources of foreign income and gains but there are various exclusions.
· FIG will need to be quantified on the tax return in order to claim relief. A claim can be made for either foreign income, foreign gains, or both, during each year of the four-year period. An individual claiming FIG relief will also lose their Income Tax and Capital Gains Tax Personal Allowances.
· For individuals moving from the remittance basis to the arising basis on 6 April 2025 (effectively this will be all individuals not eligible for the FIG regime), there will no transitional year period where any relief from foreign income can be claimed.
· Overseas Workday Relief (OWR) will now apply for up to the first four tax years of UK residence, provided the individual qualifies for the FIG regime. However, this will now be subject to a limit of the lower of 30% of the qualifying employment income or £300,000 per tax year. It will no longer matter where the employment income is paid or received. There will be various transitional arrangements for individuals claiming OWR prior to 6 April 2025 that do not qualify for the new FIG regime.
· Current and past remittance basis users will be able to rebase personally held foreign assets for CGT purposes to their market value at 5 April 2017, provided that certain conditions are met.
· From 6 April 2025, income and gains arising within trust structures (whenever established) will no longer benefit from the protected status if the settlor does not qualify for the FIG regime in a particular tax-year. FIG arising in the trust will be taxed on the settlor on the same basis as UK domiciled settlors. Distributions from such trusts can also be matched to FIG that arose pre-6 April 2025 (but see below regarding the Temporary Repatriation Facility).
· UK Inheritance Tax (IHT) will now apply to individuals based on residence, rather than domicile, such that any individual who is UK tax resident for at least 10 tax years out of the previous 20 will be within the scope of IHT on their worldwide assets (referred to as a “long-term residents”).
· For individuals that become non-UK tax resident from 6 April 2025, there will be transitional provisions for IHT, whereby they will generally only be treated as a long-term resident if they were deemed domiciled under the previous rules (15 out of 20 tax years).
· An individual will remain a long-term resident and continue to be within the scope of IHT on their worldwide assets after becoming non-resident (the IHT ‘tail’) based on the following:
o Individuals’ resident between 10 and 13 years will remain in scope for 3 tax years of non-residence;
o This will increase by one tax year for each additional year of UK residence thereafter.
· IHT will also be charged on non-UK assets comprised within a trust if the settlor is a long-term resident. This means that assets within a trust will come in and out of charge depending on the long-term residence of the settlor at the time of the charge (instead of when the trust was set up).
· There may also be a Gift With Reservation (GWR) for IHT purposes if the settlor retains an interest in the trust and is a long-term resident at the time of their death. However, where non-UK assets in a trust were excluded property before 30 October 2024, the GWR rules will not generally apply.
· The Temporary Repatriation Facility (TRF) is set to come into effect from 6 April 2025 and will allow individuals to bring foreign income and gains (previously sheltered from UK tax by virtue of the remittance basis) to the UK at a flat rate of 12% during 2025/26 and 2026/27, or at 15% during 2027/28. It will be possible to use the TRF to bring FIG used for existing Business Investment Relief investments onshore.
· The TRF will also allow individuals to receive distributions or benefits from trusts or other offshore entities if they are matched with ‘unattributed’ FIG within the structure that arose prior to 6 April 2025.
The above are the headlines from the reform paper, but we expect to provide additional details in the coming weeks.
Capital Gains Tax (CGT)
As expected, the chancellor has targeted CGT change to help raise her tax revenues, announcing an increase in the CGT rates, although the increase was not as high as some had feared. The main rates of CGT on non-residential property assets will increase from 10% (for basic rate taxpayers) and 20% (for higher rate taxpayers) to 18% and 24% respectively. The CGT rate for Trustees and personal representatives will also increase to 24%. The new rates will apply for all disposals made on or after 30 October 2024. The rates on residential property related assets will remain the same.
In another expected measure, the CGT rate on carried interest paid to Private Equity investment managers increased from 18% (for basic rate taxpayers) and 28% (for higher rate taxpayers) up to a single rate of 32% for all taxpayers. This change will apply to all carried interest realised on or after 6 April 2025.
Business Asset Disposal Relief (BADR) and Investor Relief (IR) will remain in place, with the lifetime limit for BADR being frozen at £1 million per person and the IR limit being reduced to £1 million for qualifying disposals made on or after 30 October 2024. However, the rate applicable to BADR and IR gains will increase from 10% to 14% from 6 April 2025, increasing to 18% from 6 April 2026.
Inheritance Tax (IHT)
Currently, Business Property Relief (BPR) and Agricultural Property Relief (APR) of up to 100% is available on qualifying business and agricultural assets. From 6 April 2026, the 100% rate of relief will continue to be available for the first £1m of combined agricultural and business property. Any property in excess of £1m will only attract relief at 50%.
For shares designated as ‘not listed’ on the markets of a recognised stock exchange e.g. AIM, BPR will be reduced from 100% to 50%, with this change also applying from 6 April 2026. These shares do not fall within the 100% rate of relief noted above meaning that the entirety of the value of these shares would benefit from only 50% relief (rather than any excess over £1 million).
Currently, many unused pension pots are IHT free on death. From 6 April 2027, most unused pension funds and death benefits will be included in an individual’s estate for IHT purposes.
The current nil-rate band for IHT is £325,000 with the residence nil-rate band increasing this by £175,000. These bands were due to remain in place until 5 April 2028, but this retention has been extended to 5 April 2030.
Employers’ National Insurance Contributions (NICs)
The current rate of Employer’s National Insurance Contributions (NICs) of 13.8% is set to rise by 1.2% to 15%, from the start of the 2025/26 UK tax year (from 6 April 2025). At this point, the threshold at which employers will be obligated to begin paying Employer NICs will also be reduced from £9,100 per employee per annum to £5,000.
Smaller businesses will be protected as the Employment Allowance (currently £5,000) will increase to £10,500 and be extended to all eligible employees by removing the £100,000 cap.
Personal Income Tax and CGT Allowances
It has been confirmed that the freeze placed on the Income Tax and National Insurance Contributions thresholds will not be extended past 5 April 2028. From April 2028, these thresholds will be uprated in line with inflation.
Corporation Tax
The headline rate of Corporation Tax will be capped at 25% for the duration of this Parliament (until 2029 currently). The Corporation Tax Small Profits Rate at 19%, marginal relief at its current rate and thresholds will be continued. The £1 million Annual Investment Allowance and permanent full expensing first year allowances will be kept in place. In Spring 2025, there will also be an update on how the Corporation Tax system will be modernised in respect of technology.
Stamp Duty Land Tax (SDLT)
The Government have announced a further increase in the SDLT surcharge for purchases of additional residential properties from 3% to 5%. In addition, the rate of SDLT payable by non-natural persons when purchasing residential properties worth more than £500,000 will increase from 15% to 17%. These new provisions will apply for transactions with an effective date on or after 31 October 2024.
VAT on private school fees
In line with their manifesto promise, private education providers (including both day and boarding schools and vocational training establishments) will be required to charge VAT at the standard rate of 20% on their school fees. This will apply from 1 January 2025.
For more advice on how the Budget may affect your tax affairs: