Words by Stuart Ritchie, an expert tax advisor with over 30 years of experience in the field who founded his own accountancy firm Ritchie Phillips LLP in 2003.
Chancellor Rachel Reeves delivered Labour’s first Budget since 2010 on Wednesday 30 October 2024. She pledged to ‘invest, invest, invest’ to drive growth and ‘restore economic stability’.
The reality was rather different. Predicted growth in gross domestic product (GDP) was anemic at best, consistent with a high tax, high spend government. Tax as a percentage of GDP will be the highest it has been in a long time and there are further increases in government debt meaning the national debt is approaching the level of GDP.
All of which might be considered depressing. Given the Budget aims to raise £40 billion in taxes, a number of tax raising measures were announced including:
- Employers’ National Insurance contributions (NICs) will be increased from next April by reducing the starting point at which NICs are payable and increasing the Employer’s NIC rate to 15%. This will contribute most of the tax increase.
- Capital Gains Tax rates will rise from the date of the Budget 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%.
- The 10% rate for Capital Gains Tax on business assets remains for the first £1 million of gains until 6 April 2025 when the rate increases to 14% and then to 18% from 6 April 2026.
Inheritance tax
- UK Inheritance Tax (IHT) will also move to a residence-based system from 6 April 2025. Where an individual has been a UK resident for at least 10 of the previous 20 tax years they will be charged to IHT on their worldwide assets. On leaving the UK, an individual will continue to be within the scope of UK IHT for 3 years where they had been UK resident for between 10 and 13 years, increasing by one tax year for each additional year of UK residence.
- Inherited pensions will fall within the IHT net from April 2027. The potential tax rate becomes up to 67% if your unused pension attracts 40% IHT and then the marginal income tax rate of your beneficiaries when the pension is paid out to them. Fortunately, this will not apply to pensions left to a surviving spouse or civil partner.
- Reliefs will be reformed on the passing down of agricultural and business assets to limit the 100% relief to the first £1 million of property qualifying for Business Property Relief (BPR) and Agricultural Property Relief (APR). Thereafter, the rate of relief for both BPR and APR will be 50% of the standard 40% rate of IHT for any qualifying assets over the £1million threshold. These changes take effect from April 2026. This has caused absolute furor in the agricultural sector and rightly so as farms typically have high capital values and relatively low profitability meaning there is no money to pay the IHT. It is only a matter of time before businesses make the same point, as any business of any size with profitability or assets will be adversely affected by this announcement.
School fees
- VAT will be introduced on private school fees for education and vocational training. They will no longer benefit from VAT exemption and will be subject to VAT at the standard rate of 20%.
Non-doms and resident foreigners
- The current remittance basis of taxation for UK resident non-domiciled individuals will be abolished with effect from 6 April 2025. The default position going forward will be that any UK resident individual (as determined under the Statutory Residence Test) is taxed on their foreign income and gains (FIG) on an arising basis.
- From the 2025/26 tax year, any individual who becomes a UK tax resident following a period of at least 10 years of non-UK residence can elect not to pay UK tax on FIG arising in their first four years of UK residence. There are various exclusions from the definition of FIG, but it does include distributions and benefits from non-resident trusts. Funds subject to this election can be brought into the UK without incurring a tax charge at any time thereafter, even if outside the initial 4-year period.
- For individuals who do not qualify for the FIG regime there will be a Temporary Repatriation Facility (TRF) whereby FIG arising prior to 6 April 2025 which was sheltered by a remittance basis claim is subject to a reduced rate of tax. For 2025/26 and 2026/27 this is 12%, rising to 15% in 2027/28. This can also apply to payments and benefits from non-UK trusts where these are matched with pre-6 April 2025 FIG. Once the TRF has been claimed in relation to an amount of FIG this can be remitted to the UK at any time without a further tax charge.
- From 6 April 2025, income and gains arising within overseas trusts will no longer benefit from protected status unless the settlor qualifies for the FIG regime in a particular tax year. Where they do not, FIG arising in the trust will be taxed on the settlor, subject to possible relief under the TRF.
Very serious implications for private clients
As can be seen, these changes are wide ranging and represent the greatest increase in tax in a generation. It is often said leopards do not change their spots, and this is so with this very first Budget of the newly elected Labour government.
Individuals affected by these changes need to consider their options carefully and specialist tax advice will be needed, predominantly from accountants and lawyers. Opportunities remain to mitigate the effect of these changes, for example:
- The potentially exempt transfer regime for lifetime giving for IHT or that some of these announcements have a deferred start date.
- Taking advantage of delayed starting dates for these changes such as the reform of agricultural and business property relief which only takes effect from April 2026.
- Using new opportunities becoming available such as the Temporary Repatriation Facility for non-doms effective from 6 April 2025 where remittances of foreign income and gains from earlier years will attract a concessionary tax rate.
- Revisiting older tax strategies such as leaving the UK for residence overseas, obviously on a proper basis. When done properly and in conjunction with the way the new 10-year residence based system works, could prove a beneficial way to limit the effects of IHT.
The impact of these changes should not be underestimated and individuals taking specialist advice now will be best prepared to face up to this brave new world in which we live in the UK.
About Stuart Ritchie
Stuart Ritchie is an expert tax advisor with over 30 years of experience in the field who founded his own accountancy firm Ritchie Phillips LLP in 2003, through which he provides specialist taxation and accountancy services. Ritchie is also a fellow of the Institute of Chartered Accountants in England and Wales (ICAEW), a member of the Chartered Institute of Taxation, and a chair of the ICAEW Tax Faculty Private Client Committee. This provides him with a unique insight into the developments and trends within the world of high-net-worth and ultra-high-net-worth individuals.
Stuart’s new book, Who Will Get My Money When I Die?, unpacks the seemingly complex world of wills and inheritance tax, equipping readers with the knowledge to plan their future with confidence.
