Initially predicted to be £22 billion, Chancellor Rachel Reeves had to deliver a Budget to raise funds but previously announced that there would be no increases to VAT, Income Tax and National Insurance.
Who are those with the broadest shoulders to bear the greatest burden, and how does this affect you?
Whilst the devil is always in the details, and more will likely unfold in the next few days, yesterday’s headlines are as follows:
Key Points
- Inheritance Tax (IHT): Business and Agricultural Property Relief now capped at £1 million, with excess taxed at 50%; AIM investments receive 50% IHT relief only.
- Capital Gains Tax (CGT): Rates increased to 18% (lower) and 24% (higher).
- Business Asset Disposal Relief: Rate rises to 14% (2025) and 18% (2026).
- Stamp Duty: SDLT for second homes raised to 5%.
- National Insurance: Employer NICs rise, with increased Employment Allowance.
- Employee Ownership Trust: Reform aims to prevent misuse.
Inheritance Tax (IHT)
IHT, in its current form, has existed for 40 years with only minor tweaks. Our predictions included changes to Business Property Relief (BPR) and Agricultural Property Relief (APR) and the removal of IHT relief for AIM investments.
In addition, we speculated that perhaps lifetime gifting allowances would be capped with increased survivorship periods from 7 years to 10, but the changes were milder than anticipated!
The standard Nil Rate Band of £325,000 and Residence Nil Rate Band of £175,000 remains untouched which means for a married couple with children and property to leave will still benefit from £1 million combined IHT threshold although those thresholds will remain frozen until 2030.
From April 2026, BPR and APR will now be capped at £1million, whereas previously, they could extend to the full value of the business or farm and were assessed on a case-by-case basis.
Anything over the £1 million cap will now be taxed at 50%, giving an effective tax rate of 20%.
Many businesses and farms exceed £1 million in value, and therefore, careful lifetime planning will be required so that those assets do not have to be sold or broken up to pay IHT.
AIM investments were a popular IHT planning tool for those with taxable estates who were unlikely to survive 7 years if they made a gift.
However, individuals are only required to hold the asset for 2 years to qualify for 100% IHT relief, which has now been reduced to 50% with no £1 million allowance.
No changes have been announced for trusts.
Despite being used more for asset protection than IHT saving in recent years, trusts still have their place and can assist with generational wealth planning, given that caps have not been introduced to lifetime gifting.
Using multiple trusts can still be advantageous, as each trust will still have its own Nil Rate Band if set up on different days.
Pensions previously fell outside of an individual’s estate on death, which was an effective way of passing assets to the family, but they will be included for IHT purposes from April 2027.
Capital Gains Tax (CGT)
The lower CGT rate increased from 10% to 18%, and the higher rate from 20% to 24%.
The rush of disposals to crystalise the gain on the previous rates before Budget Day paid off, with the 4% increase taking effect as of yesterday.
Business Asset Disposal Relief (BADR)
BADR (previously known as Entrepreneurs’ Relief) allows an individual to claim (over their lifetime) a lower rate of 10% tax on £1 million of business disposals. From April 2025, this will increase to 14%, and the rate will increase again in April 2026 to 18%.
This means the maximum saving will reduce from £100,000 to £60,000 after April 2026.
Accordingly, those who are considering disposing of their businesses may wish to accelerate their plans while the government provides a small window for adjustments.
Stamp Duty Land Tax (SDLT)
As of today, those purchasing second homes will be paying higher rates due to an increase in Stamp Duty Land Tax from 3% to 5%.
Our residential property department was busy exchanging contracts last night, and we suspect the same was true of other firms!
National Insurance (NICs)
While employee NICs remain the same, employer NICs are increasing from 13.8% to 15% and reducing the per-employee threshold at which employers become liable to pay NICs contributions from April 2025 to £5,000.
To support smaller businesses, the government is increasing Employment Allowance from £5,000 to £10,500 and removing the £100,000 threshold.
Employee Ownership Trusts (EOT)
Finally, having undergone the transition ourselves in September 2024, it would be remiss of us not to mention Employee Ownership Trusts briefly!
With little more than a small paragraph, the proposed reforms sound promising:
“These reforms will prevent opportunities for abuse, ensuring that the regimes remain focused on encouraging employee ownership and rewarding employees.”
Contact Our Experts
For more specific advice about how the Budget affects you or your business, contact our personal or business teams on:
01619414000
Bik-ki Wong
Partner and Head of our Wills, Trusts, and Probate
Bik-ki has over 20 years of experience acting as a Wills, Trusts, and Probate solicitor. Bik-ki is an expert in dealing with high net-worth individuals as well as those who have more complicated circumstances or those with mental capacity issues.
About Bik-ki Wong