I wonder if you had my checklist beside you as the budget speech unfolded (see post of 29 October)? Whether you did or not, here is my immediate assessment of the quite seismic changes to the capital taxes regime.
In a nutshell, where your tax planning relies or relied on 100% inheritance tax business or agricultural property relief, AIM portfolio’s or pension transfers to family members there is now a need to revisit this for all estate planning.
INHERITANCE TAX
IHT Nil Rate Bands
The nil rate band has been frozen at £325,000 since 2009 and this will continue to be frozen up to 5 April 2030. I think it was Alistair darling who was responsible for the last increase!
The ‘residence nil rate band’ is also frozen at the current £175,000 level, as is the residence nil rate band taper starting at £2 million. These are also frozen until 5 April 2030.
Unused Pension Funds & Death Benefits
The government will bring unused pension funds and death benefits payable from an undrawn pension into a person’s estate for inheritance tax purposes from 6 April 2027. Pension administrators themselves will be responsible for reporting and paying tax on such benefits and this will rightly constrain any thoughts of non-compliance. No doubt the next 2 years will involve a lot of thought on what to do in planning terms. Doubtless this will depend on individuals’ personal circumstances.
Agricultural and Business Property Relief
From 6 April 2026, agricultural and business property will continue to benefit from the 100% Inheritance Tax relief but only up to a limit of £1 million. The limit is a combined limit for both agricultural and business property. Property in excess of the limit will only benefit from a 50% relief, as will, in all circumstances, quoted shares designated as ‘not listed’ on the markets of recognised stock exchanges, such as AIM.
Taxpayers will need to re-evaluate their IHT planning where strategies rest on an assumption of the availability of BPR/APR. There is a tendency for business owners to be rather complacent when it comes to attracting these reliefs and, without planning, they can be compromised in whole or in part. The budget changes certainly emphasise a need for a more focussed approach which quantifies the likely IHT hit and addresses how families will adapt to settle a hitherto unexpected tax charge.
AIM portfolios have doubtless been an easy sell but now taxpayers will need to factor in what this exposure to IHT will mean for them going forward. It will certainly bring the anticipated performance of funds into much sharper focus as will the underlying set up and ongoing costs.
Environmental Land Management
From 6 April 2025, the existing scope of Agricultural Property Relief will be extended to land managed under an environmental agreement with, or on behalf of, the UK government, devolved governments, public bodies, local authorities, or approved responsible bodies.
CAPITAL GAINS TAX
Capital Gains Tax Rates
The Capital Gains Tax rates will increase for disposals, other than of residential property and carried interest, made on or after 30 October 2024. The basic rate of 10% will increase to 18% and the 20% rate will increase to 24%.
No changes will be made to the rates applying to the disposal of residential properties of 18% and 24%.
The rate applying to trustees and personal representatives will increase from 20% to 24% from the same date.
The changes in the main rates of Capital Gains Tax brings them in line with those paid on disposal of residential property so no need going forward to differentiate between the types of property being disposed of.
CGT Exemption
The annual exempt amount will remain at £3,000 for 2025/26.
Business Asset Disposal Relief & Investors Relief
The rate applying for individuals claiming Business Asset Disposal Relief and Investors’ Relief will increase from 10% to 14% for disposals made on or after 6 April 2025. The rate will increase again to 18% for disposals made on or after 6 April 2026.
In addition, the lifetime limit for Investors’ Relief will be reduced from £10 million to £1 million for qualifying disposals made on or after 30 October 2024. This limit takes into account any prior qualifying gains where the relief was claimed.
Carried Interest
The rates that apply to carried interest of 18% and 28% will increase to a flat rate of 32%. This will apply to carried interest arising to an individual on or after 6 April 2025.
From April 2026, all carried interest will be taxed within the income tax framework. A multiplier of 72.5% will be applied to any qualifying interest brought within the charge.
Steve Parnham
