Following a long period of uncertainty for businesses, with many decisions on hold since the 4th of July General Election, speculation over the budget and Chancellor Rachel Reeves’ announcements on Wednesday had reached fever pitch.
Investors, business owners, landlords and pension savers braced for a painful attack on their assets, gains and savings. Despite the dire warnings, for most people the day was less brutal than it could have been.
The plethora of predictions and speculation, particularly about capital gains tax, led to much prior panic selling of assets. As it happened the rise was much less than the predicted alignment with income tax rates, which would have seen massive increases on the bands.
But nevertheless an immediate rise from 10% to 18% for basic rate taxpayers and 20% to 24% for high rate taxpayers is still a substantial increase. However, residential property CGT rates will remain unchanged.
The good news, if there is much: the reduced CGT relief of £3,000 per person per year has not been touched, and neither has the 7-year potentially exempt gift transfer (PET), other smaller gift transfers, and there’s no change to the relatively generous ISA regime.
But, there’s plenty to be sore about:
Investors, businesses, employers and property owners are now faced with the prospect of yet further tax hikes, with employers’ NI contributions, capital gains tax (CGT), SDLT and IHT increases. By committing the country to £162 billion of increased borrowing the move has caused a spike in government debt and fears of mortgage interest rate rises. The government produced on Wednesday the highest spending and the highest taxing budget in more than a generation, and it’s not gone down at all well with business.
Shops and hospitality businesses are facing a punishing rise in business rates as the government fails to tackle what many have said is an unfair business tax regime. Bills are set to rise sharply next year as the reliefs put in place by the previous government are being removed. This comes on top of the £25bn national insurance hike, a 6.7% increase in the minimum wage and an all enveloping and costly workers’ rights package, due next year.
Britain’s farmers in particular have been left reeling after the imposition of an inheritance tax change when they leave farms to their heirs. It is well known that many of Britain’s smaller farms are barely profitable, many farmers are struggling to make ends meet. So there’s little cash in the kitty to pay the duty. It means many of these smaller farms may have to be sold on the death of an owner or large loans taken out.
Investors in the riskier AIM market, which attracted 100% tax relief after a 2-year investment, to encourage investment in smaller UK companies. It will now attract 50% IHT, which equates to a 20% charge.
The stamp duty (SDLT) surcharge for landlords buying second homes is increased by two percentage points from 3% to 5%, further discouraging investment in buy-to-let properties. The adverse tax regime imposed by previous governments, which restricted mortgage interest relief under section 24, remains unchanged.
A landlord buying a residential property to let for £500,000 faces a SDLT bill of £37,500, a huge amount to pay and a discouragement to invest. This, coupled with fears that exist because of the imposition of more stringent letting and eviction rules through the imminent Renters' Rights Bill, means there is likely to be no let-up in the severe shortage of rental properties.
The government has confirmed it will freeze housing benefit payments to tenants and landlords next year, for at least another year.
The move increases pressure on landlords housing benefits tenants while their costs continue to rise. The government promised to protect vulnerable people through this budget, but they’re definitely not doing it through housing benefits payments.
One of the Chancellor’s pre-budget promises was to run the most pro-business Treasury ever. But taking the measures announced in this budget, I think she’d be hard pressed to justify that claim. Yes, growth and “investment, investment, investment” is her aim, and her investment plans are certainly gobsmacking, with £40bn committed, but a £25bn levy on business hardly harbingers growth.
The UK’s debt levels will soar to £2.7 trillion. Labour is facing the additional cost of recent pay commitments to key public sector workers, a package estimated to add a further £10 billion to the government’s liabilities.
The Office of Budget Responsibility (OBR) - the independent government agency that monitors these things - has forecast limited if any growth over a 5-year period. Labour has embarked on a path of “large, sustained increases in spending, tax and borrowing”, according to the OBR forecast, and its judgement is that Labour’s first budget for 15 years will be “unlikely to increase economic growth over the next five years.”
Agricultural property relief and business property relief from 6 April 2026 is to be restricted. The previous 100% rate of relief continues for the first £1 million of combined agricultural and business property, but it will be 50% thereafter, giving an effective IHT rate (40% of 50%) above £1mn of 20%.
The government is justifying this by saying that in practice most small farms include a house, with up to £1m exempt IHT (NRB + RNRB) and each spouse gets the £1m allowance in a family farm business. But that won't apply to every business. Given the low income of farm many farm businesses and the cost of equipment - a tractor can cost up to £250,000 - the £1m allowance looks far too low. That fact the government says the liability can be paid over 10 years (with interest) is small comfort.
The rate of business property relief available goes from 100% to 50% in all circumstances for shares designated as “not listed” (i.e., AIM shares).
The current freeze in the IHT nil-rate band (NRB) and residence nil-rate band (RNRB) will be extended by another two years, through to April 2030, further eroding the value of both reliefs.
The NRB has been £325,000 since April 2009, whilst the RNRB (£175,000) has not changed since 2020. Adjusted for inflation, the NRB should be worth over £500,000 today, whilst the (residential) RNRB should be worth around £215,000. By 2030, the erosion in the value of the two nil-rate bands in real terms will bring many more estates into the scope of IHT.
Inheritance tax liabilities relate to the overall value of the estate so these can be paid from the proceeds following the disposal of other assets within an estate or by other means. Liabilities relating to agricultural and business property can currently be paid in equal annual instalments over 10 years in certain circumstances. More detail is available at www.gov.uk/paying-inheritance-tax/yearly-instalments
Wealth accumulated in a pension does not generally count towards an individual’s estate, allowing funds to be passed between generations free from IHT. This treatment will be withdrawn from April 2027, with inherited pension pots expected to be subject to IHT in the same way as cash or other investment assets.
Of all the IHT reforms announced by the Chancellor this one seems to be the most iniquitous, discouraging saving into a private pension. It brings inherited pension pots within the scope of IHT and is expected to be by far the biggest revenue generator, forecast to increase IHT receipts by £1.5bn by 2029/30.
Two side effects of this measure are that by increasing the taxable value of estates it will further erode the value of the Residential NRB (which is progressively reduced for estates valued at over £2m) and will also increase the value needing to be left to charity to access the reduced 36% rate of IHT.
The Chancellor made no changes to the potentially exempt and chargeable lifetime transfer regime, including the seven-year rule for lifetime gifts and has maintained the headline rate of IHT at 40%, heritage exemption and the exemption for spouses and civil partners.
If you die within 7 years of giving a gift there’s Inheritance Tax to pay on it, the amount of tax due after death will depend on when you gave it. Gifts given in the 3 years before your death are taxed at 40%. Gifts given 3 to 7 years before death are taxed on a sliding scale known as ‘taper relief’.
Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold. In other words, you “use-up” your nil rate band (NRB) so this taper relief is not as straightforward as it seems.
Taper relief
Years between gift and death Rate of tax on the gift
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%
7 or more 0%
Stamp duty
As mentioned above, Ranjan Bhattacharya makes the point https://youtu.be/zjqaPS1pHNY that anyone purchasing a buy-to-let for £500k would pay £37,500 SDLT whereas anyone purchasing a commercial or mixed-use property would pay just £14,500, making a strong case against residential and for commercial property investments.
Paul Johnson posting on X says:
The trustees of certain trusts are liable to an inheritance tax charge of up to 6% of the value of property held in a trust every 10 years. There is also an exit charge when property leaves the trust. Agricultural property relief and business property relief can apply to property in trust.
There will be a combined £1 million allowance for trustees on the value of qualifying property to which 100% relief applies. This is on each ten-year anniversary charge and exit charge, consistent with the treatment of qualifying property chargeable to inheritance tax on death. The government will publish a technical consultation in early 2025 on the detailed application of the policy to charges on property within trusts.
Settlors (creators of the trust) may have set up more than one trust comprising qualifying business property and/or agricultural property before 30 October 2024, in which case from 6 April 2026, each trust would have a £1 million allowance for 100% relief. 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.
This budget was always going to be painful, in Starmer's words, and it didn’t disappoint. But while some of the wilder predictions didn’t materialise, such as aligning CGT with income tax bands, or reducing the higher rate pensions tax relief, the budget was nevertheless full of painful surprises.
It would seem that Rachel Reeves is putting her faith in the government's own pet investment projects to boost the economy, and boost growth. Her Modern Supply-side economic theory is "Keynesianism on steroids", and it would seem Britain is to be part of an enormous experiment; one that increases the size of the public realm, financed by massive borrowing and, the private sector and savers.
By changing the fiscal rules the government is managing to increase borrowing to record levels. So far without a money market Truss-like reaction, and combined with tax rises it has raised enough money to embark on a huge government devised investment programme. So far however, the money markets’ reaction seems far from positive.
In my view it’s a huge act of faith and it will be interesting to see if it comes off.
References:
How Inheritance Tax works: thresholds, rules and allowances - https://www.gov.uk/inheritance-tax/gifts#:~:text=The%207%20year%20rule,as%20the%207%20year%20rule
Budget October 2024 – background Briefing Paper - https://commonslibrary.parliament.uk/research-briefings/cbp-10122/
Autumn Budget 2024 - https://www.gov.uk/government/publications/autumn-budget-2024
[image credit: Wikipedia]
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