Changes to inheritance tax (IHT) were for many the most contentious part of the UK’s Autumn Budget, with plans announced that will add a further level of complexity to what the Office of Tax Simplification already considers to be one of the UK’s most complicated taxes.
IHT is also one of the most unpopular taxes due to widely held perception it represents double taxation. The announced changes relate to less generous reliefs for business and agricultural property owners, while pensions are planned to be brought into scope in 2027.
Although there is a HMRC consultation taking place at present, this is believed to be focused on the implementation of the proposed changes, not a discussion on the policy changes themselves, and therefore offers little hope that these changes will not occur.
However, even after the proposed changes a number of planning possibilities exist, the appropriateness of which is determined by an individual’s specific situation. An expert understanding of the plethora of remaining reliefs can prove highly valuable and as with several areas of financial planning, the early planning occurs the greater the chances of favourable outcomes.
The nearly four months between the election in early July and Labour’s first budget for 14 years on 30 October meant speculation in the run up was bordering on the excessive. This was ratcheted up further by Rachel Reeves strongly hinting at possible tax rises during the chancellor’s first speech to parliament in late July, stating that “difficult decisions and challenging trade-offs” were faced in ensuring the sustainability of the UK’s public finances. This was when the £22bn “black hole” was first declared.
On budget day the top-level figures showed an additional £70bn of planned government spending per year. This will be funded by £40bn from higher taxes, earmarked for improving public services, and an additional £30bn in government borrowing that is intended to grow the economy.
Tax rises:
The majority of the higher tax revenue will come from the increase on employers’ national insurance (NI), rising from 13.8% to 15%. The threshold at which this levy applies has also been substantially lowered, reduced from £9.1k to £5k per year. These NI changes are expected to raise £25bn per year.
While the headline IHT level was left unchanged there were significant changes to reliefs and the announcement that pensions will come into scope from April 2027 is expected to more than double the number of estates subject to IHT. Business Relief and Agricultural Property Relief will be made less generous, with the former being removed from AIM stocks where an effective 20% rate (half the 40% IHT rate) will apply from April 2026 and the latter reformed so that there is now 100% relief up to £1m and 50% thereafter, meaning the same effective 20% rate (half the 40% IHT rate) applies. Unlisted stock might also benefit from Business Relief of 100% relief on the first £1m.
Capital Gains Tax (CGT) was increased, although the rises were less than some had speculated. Effective from budget day, CGT is now 18% for non and basic-rate taxpayers and 24% for additional and higher rate taxpayers. The same rates apply on property gains. Business owners selling their companies also face higher taxes, as Business Asset Disposal Relief is rising from a 10% tax to 14% and then to 18% on the first £1m of lifetime business gains over the next two tax years.
Pre-election promises to add VAT to private school fees, tax non-doms further and increase “carried interest” taxation for private equity partners were announced broadly as anticipated, although revenues are expected to be slightly lower than originally modelled.
Despite some concerns, there were no changes to ISAs, pension tax relief or the amount of tax-free cash you can receive from a pension. The nil-rate band and the residence nil-rate band were frozen for a further two years, up to April 2030.
Debt to increase:
Government debt is expected to rise to be equivalent to £2.8tn, or £99,000 per UK household, according to the Office for Budget Responsibility, the official public watchdog. Although it is not uncommon for the UK to run a budget deficit — the last surplus was during 1998/99 — and although the annual deficit is reducing, a surplus is likely to be at least seven years off.
The additional spending will see sizable increases in healthcare (£22.6bn per year, a 12.5% rise) and education (£6.7bn per year, an 8% rise) funding. There will also be significant funding set aside for the Post Office/Horizon scandal (£1.6bn) and the infected blood scandal (£11.8bn) regarding HIV and hepatitis C.
Quilter Cheviot Limited does not provide tax, legal or accounting advice.
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