BUDGET COMMENTARY
The Chancellor, Rachel Reeves, today delivered her first Budget Statement.
Given all the noises coming from Whitehall in the weeks leading up to today, it’s fair to say that the majority of our clients expected bad news. Our clients are mostly SME’s, entrepreneurs and family businesses, otherwise known as “wealth creators”. Ahead of the budget, we were told to prepare for pain and prepare for tax rises, unless, of course, you are “a worker”.
As usual, the Budget was accompanied by hundreds of pages of press releases, many of which were not mentioned in the speech. These contained a few nasty surprises.
This is our initial summary of the changes that we believe will affect the clients of WBR SSAS, WBR Law and WBR Tax.
IMPACT FOR PENSIONS
General Pension Reforms
There is a technical consultation process on how inheritance tax may be applied to unused pension pots with effect from 6 April 2027.
WBR will, of course, respond to this consultation.
Changes to the legislation
Other than the above, there are no major changes that would affect the vast majority of our SSAS pensions.
With immediate effect, there are changes to the rules for pension transfers to certain overseas pension schemes, which will mean that more schemes will be subject to the Overseas Transfer Charge. Anyone considering such a transfer should take advice on the new rules before they proceed.
Impact on SSAS pensions
From 6 April 2026, it will be a requirement for scheme administrators of UK registered pension schemes to be UK resident. This will potentially cause issues for those schemes where the scheme administrator is now living overseas.
Contribution Limits
Defined Contribution Scheme – the maximum annual contribution is still £60,000.
Defined Benefit Scheme – the maximum annual employer contribution is still likely to be between £150,000 and £180,000 per member per year, depending on actuarial considerations. The amount is based on an actuarial calculation of the contribution required to receive an annual pension of £3,750 (1/16th of £60,000).
The three year carry back rules for contributions to either scheme remain unchanged.
When an individual has flexibly accessed a defined contribution pension scheme, the tax relief on future pension contributions is restricted. This Annual Allowance remains at £10,000.
There was no change to the Pension Commencement Lump Sum rules, and the maximum tax free lump sum payment amount which, for many of our clients is capped at £268,275.
As expected, there was no re-introduction of the Lifetime Allowance.
IMPACT FOR BUSINESSES
The Corporation Tax rate will remain at 25% for companies with annual profits of more than £250,000 for the duration of this Parliament, together with announcing that the exemptions for gains on disposals of substantial shareholdings and for dividends paid to UK companies will be maintained.
The government also committed to ‘Full Expensing’, along with the £1m Annual Investment Allowance and R&D reliefs for the same period. The Government’s “roadmap” states that it will monitor international developments with a view to ensuring the UK’s regime remains competitive.
New Targeted Anti-Avoidance Rules, applicable from 30 October 2024, will be introduced to end the practice of participators who move loans between associated companies, meaning that a s455 charge now arises on the amounts extracted.
The Rate of Employer National Insurance will be increased from 13.8% to 15.0% from 6 April 2025. To add to this, the per-employee threshold at which employers start to pay NIC will be reduced from £9,100 to £5,000 per annum. The additional employer NIC on this last point equates to £615 per employee, per annum.
In view of supporting small businesses with more than one employee, the Employment Allowance will increase from £5,000 to £10,500 for eligible employers each year.
The National Living Wage will increase for individuals aged 21 and over to £12.21 an hour from 6 April 2025. The National Minimum Wage for 18 to 20 year olds will also increase, to £10.00 an hour.
The government announced its first steps to reform the Business Rates system, with some new rules and rates to apply from 2026/27. From April 2025, the small business multiplier will be frozen and a 40% relief will be given to properties in the retail, hospitality and leisure sectors.
INDIVIDUALS
Income Tax
For individuals, the personal allowance will remain frozen at £12,570, and the threshold at which individuals will become liable for the higher rate of 40% will remain at £50,270. These rates will continue to be frozen until 5 April 2028, when they will be uprated with inflation.
The additional rate of income tax (45%) remains at the rate of £125,140.
The Dividend Allowance that applies from 6 April 2024 is £500.
Capital Gains Tax
The Capital Gains Allowance that applies from 6 April 2024 is £3,000.
However, the Capital Gains tax rates will increase from 10% to 18% for lower rate taxpayers, and from 20% to 24% for higher rate taxpayers.
Business Asset Disposal Relief will remain at a lifetime limit of £1m, but the tax rate will gradually increase. Currently 10%, this will increase to 14% in 2025/26 and 18% in 2026/27.
In view of the speculation about the increase in capital gains tax, it is perhaps no surprise that anti-forestalling clauses are being introduced for uncompleted contracts before 30 October 2024. There are also some changes to Capital Gains Tax share reorganisation provisions for the purposes of claiming Business Asset Disposal Relief.
Stamp Duty Land Tax for individuals purchasing additional residential properties and purchases of residential properties by companies (and other non-natural persons) on or after 31 October 2024, will incur an increased ‘higher rate’, with a 5% surcharge added to the standard rates of SDLT (up from 3%).
It should be noted that from 1 April 2025, SDLT for residential properties will revert to their ‘pre-temporary increase’ levels, with the nil rate band being reduced from £250,000 to £125,000.
Companies buying residential properties for more than £500,000, which are not intended for a commercial purpose pay a single rate of SDLT at 17% from 31 October 2024.
Inheritance Tax
The rate of inheritance tax remains the same, and the lifetime thresholds have been frozen until 2030, at £325,000 for the nil rate band and an additional £175,000 for the residence nil rate band.
However, the bad news is that the government has also announced it will reform agricultural property relief and business property relief. Relief of up to 100% is currently available on qualifying business and agricultural assets.
From April 2026, the 100% rate of relief will continue for the first £1m of combined agricultural and business property. In excess of £1m, the combined relief will be at 50% thereafter. Unused relief is not transferable to a spouse.
The main losers will be those with family farms and businesses worth in excess of the new limits.
The government will also reduce the rate of business property relief available from 100% to 50% in all circumstances for shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.
Couples who have entered into “Double Dip Inheritance Tax Planning” would be advised to revisit their inheritance tax planning.
Business Owners Selling or Exiting a Business
The four most common exit routes for an individual from a business are:
- Liquidation
- External Sale
- Internal Sale – Employee Ownership Trust
- Family Succession
The increase in CGT rates will affect the liquidation route, making this more expensive for many individuals, although the retention of the Business Asset Disposal Relief makes a liquidation of a small business still relatively tax efficient.
The increase in CGT rates may also affect those selling their businesses to an external buyer. As already mentioned, the substantial shareholding exemption will remain, meaning that a holding company can still sell a trading subsidiary without corporate tax.
An internal sale is usually made via a Management Buy Out or a sale to an Employee Ownership Trust. The Management Buy Out route is affected by the increase in CGT rates. With regard to Employee Ownership Trusts, these are still free of capital gains tax. There is a tightening up of some of the Employee Ownership Trust rules, mainly aimed at situations where business owners have pushed the valuation or where they have attempted to sidestep the disqualification rules by having offshore trustees. However, the only change that will affect our EOT clients is that the period in which the Disqualifying Event rules might apply for a seller will be extending from one year to four years after the end of the tax year of the sale.
With regard to succession planning, it has traditionally been very tax efficient to pass a trading business down via a Will. However, the changes to the inheritance tax rules may change the situation somewhat. Going forward it would appear to make more sense in many situations for the family to exit via a Family Buy Out or perhaps to look at how to transfer the future growth in value of a business via the use of Growth Shares.
For those clients where their trading company owns their commercial properties, there appear to be no major changes to the demerger rules that would change the ability for the company to hive off the property.
Post-exit, the use of a Family Investment Company as a long term family wealth protection measure is likely to become more popular, given the changes to inheritance tax, and specifically, the Business Property Relief regime.
Investments in Venture Capital
There were no changes to the EIS and SEIS rules, and the limits remain as before.
The lifetime limit of Investors Relief will reduce from £10 million to £1 million on qualifying disposals on or after 30 October 2024.
International Tax Issues
The previous Government had announced changes to the tax rules for non-domiciled individuals. From 6 April 2025, the concept of domicile as a relevant connecting factor in the UK tax system will be replaced by a system based on tax residence.
Any individual or family that is currently relying on a non-UK domicile status or non UK residence status to reduce their exposure to UK income tax or inheritance tax should review their tax affairs as soon as possible.
CONCLUSION
It was clear from the outset that the new Government was going to use this Budget Statement as an opportunity to get the painful messages in early, assigning the blame to the previous Government for the mess that it inherited.
And yes, there were some painful messages in there …..
If you would like to discuss any aspect of the Budget Statement with us, please contact your usual WBR representative. Nothing in this document constitutes advice. This document has been produced from an initial review of HM Treasury papers following the Budget. There is still much to assimilate and we will update accordingly.