Autumn Budget 2024 – How might capital taxes be affected on 30 October?
Key points
- There could be changes to inheritance tax and capital gains tax rates, reliefs or allowances on 30 October but nothing is certain.
- It may be sensible to take advice on bringing certain gifts or restructuring forward.
- Those whose estates might be affected should review their assets make sure they are informed and prepared to act after Budget day.
The Autumn Budget is fast approaching, and potential changes to inheritance tax (”IHT”) and capital gains tax (“CGT”) have been the subject of considerable speculation in recent weeks.
It has already been confirmed that IHT (along with income tax and CGT) will change from April 2025 in relation to non-UK domiciled individuals, with the rules considerably tightened and to be based on a person's tax residence, rather than domicile. Many trusts that currently escape UK IHT because of their non-UK domiciled status will also be within the scope of IHT from April 2025.
While we wait for further detail on how these rules and transitional arrangements will apply in practice, the possibility of changes to the UK’s IHT and CGT regimes more generally is also being discussed, particularly as neither were mentioned in Labour’s manifesto and have not been specifically ruled out as areas of reform. In this article we explore what changes the new government might make to capital taxes.
Inheritance tax – gifting and the ‘seven-year rule’
There are various changes that could be made to IHT to raise revenue. Possible changes could include increasing the 40% tax rate or making changes to the IHT ‘general’ or ‘residence’ nil rate bands (either for all estates or for those over a certain threshold).
There is also the possibility that the IHT rules on lifetime gifts could be reformed. Gifts between individuals are generally ‘potentially exempt transfers’ for IHT which means that they will become exempt if the donor survives seven years from making the gift. IHT due on a ‘failed’ potentially exempt transfer (where the donor dies within seven years) is usually payable by the recipient of the gift. Once a donor has survived for three years, the IHT charge reduces by 20% each further year, with a maximum 80% reduction in the full IHT charge if a donor dies between years six and seven.
The government could decide to abolish this rule altogether and instead apply a lifetime gift tax. Alternatively, the seven-year survival period from the date of a gift could be extended so that a greater number of lifetime gifts are caught and charged to IHT on death. Changes to rates, nil rate bands and gifts could be very unpopular, particularly if they appear to target anything but the largest estates.
Inheritance tax – relief for agricultural and business assets
The government could also look to further restrict the valuable reliefs for those owning business and agricultural assets, which have been the subject of rumoured reform for some time.
IHT business property relief (“BPR”) and agricultural property relief (“APR”) reduce an IHT transfer (lifetime or death) by up to 100%. There are several categories of qualifying business asset, including unquoted shares in a trading company (currently including AIM shares) and sole trade and partnerships that are ‘mainly trading’. The conditions can be complex and the requirements and level of relief differs depending on the nature of the property and how it is held (e.g. by an individual or trust).
Changes announced on 30 October could include, for example, a reduction in rates (currently 100% or 50%) or a tightening of the rules around a business’ trading status. Alternatively, the government could look to introduce a cap on the value of relief, similar to the lifetime cap for capital gains relief on business assets – see below. These generous reliefs help to preserve trading businesses and farms as they are passed to the next generation, and arguably a significant change to the rules will require more planning and consultation than some of the other potential changes to IHT.
Capital gains tax
CGT is charged on disposals of ‘chargeable assets’ (most property other than cash) and in most cases applies to sales or gifts. An uplift to the CGT rates would be a relatively straightforward change in comparison to some of the other options discussed. The main rate of CGT is currently 20% and earlier this year the higher rate for CGT on disposals of residential property was reduced from 28% to 24%. Aligning CGT rates with income tax rates (up to 45%) is one possibility and the Labour Party has already pledged to close the "loophole" in the UK's carried interest rules, which enable certain remuneration in the private equity industry to be taxed at 28% rather than at income tax rates.
There is also a concern from some that CGT relief for businesses will be reduced. Currently taxpayers who sell or give away their business can claim ‘business asset disposal relief’ on up to £1 million of lifetime gains, reducing the rate of CGT to 10% on those gains. The lifetime limit was previously £10 million for disposals prior to March 2020.
Summary
It’s not usually advisable to make significant changes based on Budget speculation and the management of wealth involves many considerations of which tax is only one. In many cases the tax strategy will need to fit around broader family and asset protection needs and should not be done in isolation.
However, it seems that some changes will be made and with that in mind, individuals and trustees may wish to consult their advisers now, pre-Budget, and consider any of the following:
- Bringing existing plans for gifts, sales and other transfers forward so they occur before Budget day where practical. Depending on the changes this may allow transactions to benefit from lower tax rates or more generous reliefs. It could set the seven year ‘clock’ running for IHT gifting purposes or rebase a chargeable asset for CGT purposes.
- Making transfers to trust where an outright gift or sale is not currently desirable. The tax implications will need to be carefully considered.
- Taking out insurance to mitigate any possible IHT charges.
- Planning to make use of general IHT reliefs, e.g. the current IHT nil rate amounts.
- Reviewing how assets are currently held and restructuring to make reliefs more robust, for example the trading/investment split for BPR.
Regardless of whether any action can or should be taken before 30 October, this is certainly a good time for individuals, business owners and trustees to review their current plans and make sure they are in a position to respond the new rules after Budget day, fully informed of the relevant changes.
