As the dust begins to settle on the Budget, lawyers like me have had opportunity to get to grips with the changes made and to start thinking about tax and estate planning.
Roythornes co-hosted a Succession event on Tuesday 5 November (which was put in the diary before the Budget was announced!), and, naturally, those who attended had several questions about the changes made to both Capital Gains Tax (“CGT”) and Inheritance Tax (“IHT”). Personally, in addition to the changes to CGT and IHT, I have also found clients are concerned about the changes to SDLT and the surcharge for additional properties which has increased to an additional 5% (up from 3%) from 31 October.
CGT
Before the Budget, there were concerns that the rates of CGT would be aligned with Income Tax. That did not happen.
The higher rates, which apply to capital gains on residential property, are staying the same.
However, the “normal rates” are changing, so that the lower rate is increasing from 10% to 18%, and the higher rate from 20% to 24%. This brings the “normal rate” in line with the current higher rates of CGT and applies to disposals after 30 October 2024.
In addition, changes were made to Business Asset Disposal Relief and Investor Relief. The lifetime limit on gains was kept at £1m, but changes were made to the rates of the relief. Currently, qualifying gains are taxed at 10%. From 6 April 2025, that rate increases to 14%, and then 18% from 6 April 2026.
Advice should be taken at an early stage where BADR is being considered as part of a sale of business assets.
IHT
Firstly, it was announced that the nil rate band thresholds (£325,000 for the nil rate band and £175,000 for the residence nil rate band) will continue to be frozen until 2030. This means that more people are more likely to fall into IHT.
Before I move onto the other announcements, it is worth noting that we are due to see a consultation into the proposed changes at which point I expect the detail will be worked out, and we may even see changes to how the changes to IHT work in practice.
Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”)
Legislation will be introduced in April 2025 to extend APR to cover land in an environmental agreement with or on behalf of, the UK government, devolved governments, public bodies, local authorities, or relevant approved responsible bodies. The key here is that this extension is still not in place, so advice should be taken where schemes have been entered into.
The big announcement was the reform of APR and BPR, so that only the first £1m of combined business and agricultural assets continue to attract relief. Any assets over that IHT allowance are taxed at 20% (so 50% relief).
The rate of relief on AIM shares in all circumstances is being reduced from 100% to 50% from April 2026. The summary document states that “Assets automatically receiving 50% relief will not use up the allowance”, so it appears this will be separate.
The £1m threshold seems incredibly low. The summary document says that “The reforms mean the majority of claims for these reliefs will be unaffected. Almost three-quarters of estates claiming agricultural property relief and the majority of estates claiming business property relief in 2026 to 2027 are expected to be unaffected by these reforms.” I struggle to see how this will be true moving forward.
Generally, I would expect those with potentially relievable assets to take stock of what they have, who owns it, and the documents in place (e.g. partnership documents, Wills, LPAs, trusts). Then, to consider a review, to consider succession and potential planning steps. Having “your ducks in a row”, at least, as the detail of the changes becomes clearer would allow you to take quick steps to plan if needed.
Trusts
It appears a separate £1m allowance will apply to trusts as well as individuals, including ten-year charges, exit charges and transfers into trust (i.e., trusts part of the relevant property regime).
This applies to existing trusts set up before 30 October 2024. In that case, it is proposed that each trust will have its own £1 million allowance.
It is important then that all trusts holding relievable property are reviewed, to consider the impact of a potential tax charge (say, if there is a ten-year anniversary coming up), how that will be funded; or if appointments need to be made (or, indeed, if the trust should be wound up). This is far from simple, as trusts are often set up not only with tax in mind, but with asset protection also a factor.
In respect of new trusts, we are told “The government intends to introduce rules to ensure that the allowance is divided between these trusts where a settlor sets up multiple trusts on or after 30 October 2024.” – so multiple trusts won’t work.
Gifts
Fortunately, it seems gifts are still an option (and we appear to still have CGT holdover relief!).
The detail on gifts before 30 October to individuals (known as potentially exempt transfers – PETs) is not express, but it looks like existing PETs made before the Budget where the death is after 6 April 2026 will be included in the allowance.
For gifts from 30 October, the summary is clear on this – “The new rules will apply for lifetime transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026”. This means the allowance will apply to those gifts, after April 2026.
Gifting assets between family members to make the use of everyone’s allowance is one planning step which may help plan for IHT given the introduction of the allowance. However, it is not a simple as that (it never is). You need to consider the CGT and SDLT consequences, asset protection (e.g. the risk of marital difficulties), Trust Registration Service requirements and legal title matters. For IHT, consideration should be given to the value of the gift (it is the value at the date of the gift not the date of death that is brought into account) and therefore timing, versus the need to “get the seven-year clock ticking”. Term life insurance may also be considered.
Pensions
The government will bring unused pension funds and death benefits payable from a pension into a person’s estate for inheritance tax purposes from 6 April 2027. Again, this is subject to consultation, so we still need the detail, but this is another big change.
Historically, we would have been less concerned about the pension pot in an IHT illustration, though with the caveat that if it paid into, say, the surviving spouse’s hands then it would be taxable in their estate on death. Now, post-April 2027, pensions form a very key part of the IHT conversation.
Advice should be taken at an early stage involving both your pension advisor and your lawyer. You should consider nomination forms and the use trusts, and the potential differences pre- and post-April 2027. Advice should also be taken on the options for funding any IHT, how it will be paid; and in respect of when tax-free lump sums should be taken, and their role in the planning for IHT on the pension.
I appreciate there is a lot to digest above, a lot of detail still to be worked out, and perhaps a good deal of uncertainty. I feel that solutions are likely to be personal to you and your priorities, which means it is unlikely there is a one size fits all approach. Of course, Roythornes is happy to help guide you through these challenges.