A new Government, a new Chancellor, and a new approach to the UK’s fiscal policies. Rachel Reeves entered her first Budget with a strong message that her measures would lead to “an economy that is growing, creating wealth and opportunity for all.”
To achieve this, she made it clear that the “only way to drive economic growth is to invest, invest, invest.” Echoing the last Labour Government’s pledge on “Education, Education, Education” more than 14 years ago, the Chancellor was quick to recognise that there was difficult work ahead with slow economic growth and a £22 billion hole in the public purse.
As the UK’s first female Chancellor of the Exchequer, Reeves did not hold back about the inheritance of the Government’s current financial situation and the challenges that lay ahead. In her speech, she set out a £40 billion tax-raising strategy, with a clear focus on policies that would contribute to long-term economic stability.
Economic Outlook
While the Labour Party inherited a black hole of £22 billion, the economic outlook for the UK looks more positive. The Chancellor committed to bringing “balance and stability” to economic growth, with the aim of improving long-term prospects.
The 2024 Budget has introduced significant changes to Capital Gains Tax (CGT) and the taxation of carried interest, aiming to ensure asset owners contribute a fair share while maintaining the UK’s competitiveness in international tax markets. But how will these changes impact you, and what steps can you take to manage them effectively?
Capital Gains Tax Rate Adjustments
The Budget sees an increase in the lower CGT rate from 10% to 18% and the higher CGT rate from 20% to 24%. These changes align CGT rates on most assets with those applicable to residential property, which remain unchanged.
These adjustments represent a major change for investors and business owners. It’s a time to reassess investment strategies and consider using reliefs and allowances to optimise your tax position.
Available Reliefs and Allowances
Despite the rate increases, there are still strategies you can use to manage your CGT liability:
1. Annual Exempt Amount (AEA)
Although the AEA has been reduced in recent years, it remains a valuable tool. Individuals can still offset £3,000 of their gains tax-free (£6,000 for married couples or civil partners who can transfer assets between them).
2. Spousal Transfers
Transferring assets between spouses or civil partners before disposal can reduce the overall tax liability by utilising both partners’ allowances. This can also help in accessing lower tax rates and effectively managing CGT liabilities.
3. Bed and ISA / Bed and SIPP Strategies
Selling assets and repurchasing them within an Individual Savings Account (ISA) or Self-Invested Personal Pension (SIPP) can shield future gains from CGT, helping to reduce the taxable gain on any future asset disposals.
Reforms to Carried Interest Taxation
Carried interest, the profit share received by fund managers, will undergo significant changes as well.
– From April 2025, the CGT rate on carried interest will rise to 32%.
– From April 2026, carried interest will be taxed as income, potentially leading to higher tax liabilities for fund managers.
The reclassification of carried interest as income marks a substantial shift for fund managers. This calls for a thorough review of compensation structures and tax planning strategies to adapt to the new regime.
Changes Affecting Limited Liability Partnerships (LLPs)
Previously, LLPs could transfer assets within the partnership tax-free until liquidation. However, from October 2024, assets contributed to an LLP will be taxable from the outset, addressing certain tax avoidance strategies.
LLPs must carefully evaluate the tax implications of asset contributions, reassess their structure’s suitability, explore alternative options, and plan for potential cash flow needs. Accurate valuations and regular tax reviews are central to adapting to these changes and avoiding unforeseen liabilities.
Business Asset Disposal Relief (BADR) Changes
The Autumn 2024 Budget has introduced several changes to Business Asset Disposal Relief (BADR), a vital tax relief for business owners seeking to reduce CGT liabilities when selling all or part of their business. The changes, though not as drastic as anticipated, still have significant implications for business owners.
Key Changes to BADR Rates
The much-discussed abolition of BADR has not materialised. However, the rates are set to rise over the next two years. From April 2025, the BADR rate will increase from 10% to 14%, and by April 2026, it will align with the lower CGT rate of 18%.
These changes will bring BADR closer in line with the main CGT regime, reflecting the government’s goal of balancing tax advantages for entrepreneurs with the need for a fair tax contribution. This phased increase gives business owners time to plan their tax strategy ahead of the changes.
What Should Business Owners Do Now?
The phased nature of these changes provides a window of opportunity to reassess tax strategies. For those considering selling their business, it’s crucial to review potential disposals and whether acting before the new rates take effect in April 2025 could reduce tax liability.
The timing of a sale can make a significant difference to your financial position. Delaying a sale until after the new rates could result in a substantially higher tax bill, potentially impacting long-term financial goals. Early preparation can ensure you’re in the best possible position to maximise relief and minimise liabilities.
Planning Ahead: Key Considerations
While BADR remains an excellent relief for business owners, reducing CGT on qualifying disposals, the increase in the relief rate underscores the importance of planning ahead. Here are some ways to ensure that you take full advantage:
– Review Business Valuations: Regular business valuations will ensure you’re in the best possible position to qualify for BADR.
– Consider Restructuring: Review your business’s ownership structure and assess if restructuring could help optimise reliefs.
– Timing of Sale: Accelerating a sale before April 2025 could allow you to take advantage of the lower rates.
– Tax-Free Allowances: Maximising tax-free allowances and transferring assets between spouses or partners may reduce the overall tax burden.
Business owners must also ensure they meet all qualifying criteria, such as holding shares or assets for at least two years and being actively involved in the business.
Contact us today to discuss how any of the above changes may affect you, and let us help you optimise your tax position.
The OBR’s forecasts predict real GDP growth to be:
– 1.1% in 2024
– 2.0% in 2025
– 1.8% in 2026
– 1.5% in 2027
– 1.5% in 2028
– 1.6% in 2029
Reeves’ fiscal approach will not rely on borrowing to fund current spending, instead focusing on higher taxes to end austerity. Borrowing will only be used for investment that benefits the nation’s future.
Capital Gains Tax
Another substantial change was an increase in the standard Capital Gains Tax (CGT) rates:
– Lower rate: From 10% to 18%
– Higher rate: From 20% to 24%
The CGT rates for property disposals remain unchanged, but those looking to dispose of business assets or significant shareholdings will face increased taxes. The Business Asset Disposal Relief (BADR) and Investors’ Relief will see an increase in rates to 14% from April 2025, with the lifetime limit for Investors’ Relief being reduced to £1 million for all qualifying disposals after 30 October 2024.
Inheritance Tax
For those hoping to pass on wealth to the next generation, the Budget confirmed significant changes to Inheritance Tax (IHT). These include tightening of Agricultural Property Relief (APR) and Business Property Relief (BPR), which will be reduced starting in April 2027.
Key Changes to IHT for Farmers:
– APR: The 100% relief on agricultural property will apply only to the first £1 million of combined agricultural and business assets. Anything above this threshold will be subject to a reduced relief of 50%.
– BPR: Business Property Relief will also be reduced, particularly affecting shares not listed on recognized stock exchanges, such as those in the AIM market.
This could create a significant IHT burden on family-run farms and businesses, especially those with large land or property holdings.
Impact on Family Farms and Agricultural Businesses
The reduction in APR and BPR reliefs could place additional strain on family farms and agricultural businesses that traditionally rely on these reliefs to minimize IHT when passing on assets to the next generation. Farmers and business owners will need to carefully evaluate their estate plans and consider strategies to mitigate the impact of these reforms, such as early transfers of ownership, gifting strategies, or setting up trusts.
Overseas Wealth and Business Tax
The Government will also abolish the non-domiciled (non-dom) tax status from April 2025, replacing it with a new residence-based system. This will impact the way overseas wealth is treated for tax purposes, with stricter rules on the taxation of offshore assets.
This policy shift could have an impact on high-net-worth individuals, particularly those who have benefited from non-dom status, but it will also serve to simplify tax administration for international businesses and investments.
Final Thoughts
The 2024 Budget has delivered significant changes to taxation, with a clear focus on closing the fiscal gap and ensuring that the UK’s tax policies promote fairness and long-term sustainability. The changes to CGT, carried interest, and IHT present challenges but also offer opportunities for proactive tax planning.
If you have any concerns about how these tax changes might affect you, your business, or your family, now is the time to seek expert advice and plan for the future.