With the new Labour government’s first budget, we see a mix of tax increases and preserved allowances.
While some of these changes are substantial, there are still planning strategies that can help you make the most of the current landscape. Here’s what you need to know.
For Investors
- ISA Allowances Unchanged: Despite speculation about potential cuts, annual subscription limits will remain at £20,000 for ISAs, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs and Child Trust Funds until 5 April 2030. Our oft used GIA to ISA strategy continues to offer a tax-efficient path, moving funds from General Investment Accounts (GIA) into ISAs annually, allowing you to shelter more of your investments from taxes over time.
- British ISA: It was also confirmed that the British ISA will not proceed.
- Capital Gains Tax: With the increase in rates to 18% for basic rate and 24% for higher-rate taxpayers, the value of tax wrappers like ISAs and pensions has never been greater. For investors with assets in GIAs, this highlights the importance of reviewing your strategy to ensure you’re using these wrappers to full advantage. We’ll be running comparisons against other strategies over the coming days but 18% and 24% remain pretty attractive rates compared to Income Tax.
For Business Owners
- Employer NICs: Employer National Insurance Contributions will rise to 15% next April. However, to balance this increase, the Employment Allowance has been boosted from £5,000 to £10,500. This expanded relief means that many small businesses will continue to be exempt from NICs, softening the impact of rising rates. Reviewing payroll strategies to maximize this allowance is essential for keeping costs manageable, especially for those operating with smaller teams.
- Corporate Tax Stability: While corporation tax remains capped at 25%, offering stability, business owners should prepare for a higher tax burden overall. With public finances tight, the government has made clear that larger businesses are expected to shoulder their share.
For Retirees
- State Pension Triple Lock: The Triple Lock system has been maintained, ensuring state pensions rise in line with inflation, earnings, or a minimum of 2.5%. This provides vital income security, especially in an inflationary environment, and may even prompt some retirees to reevaluate drawdowns if the state pension meets more of their needs.
- Inheritance Tax on Pensions: Starting in 2027*, pensions will be included in the estate for inheritance tax (IHT) purposes. Previously, pensions were a powerful IHT-efficient tool, often left untouched for heirs. This shift makes it crucial to revisit pension drawdown strategies and estate plans, especially for those with substantial pension pots.
*As always, the devil is in the detail and reading the initial publication of draft legislation on this I am unconvinced it will be enacted quite as the draft legislation reads today. We will make careful adjustments to financial plans in due course but only when we have clarity on the full implications of the changes.
For Property Investors
- Stamp duty: It was announced that there would an increase in the higher rates for Additional Dwellings of Stamp Duty Land Tax from 3% to 5% from 31 October 2024. These higher rates apply to purchases of second homes, buy-to-let residential properties and companies purchasing residential property. The policy intent is that those looking to move home or purchase their first property will have a comparative advantage over those purchasing additional property. Those who exchanged contracts prior to 31 October 2024 are not affected by this rate increase.
- Furnished holiday lets: As previously announced in the Spring budget, the beneficial treatment over other property businesses will be removed for furnished holiday let landlords in 4 key areas by:
- applying the finance cost restriction rules so that loan interest will be restricted to basic rate for Income Tax
- removing capital allowances rules for new expenditure and allowing replacement of domestic items relief
- withdrawing access to reliefs from taxes on chargeable gains for trading business assets
- no longer including this income within relevant UK earnings when calculating maximum pension relief
The measure will have effect from April 2025.
For Families
- Personal Allowance Freeze: The government’s decision to freeze income tax and NIC thresholds until 2028 effectively pulls more people into higher tax brackets, a phenomenon known as “fiscal drag.” This could impact household budgets, especially as wages rise with inflation but personal allowances don’t. Reviewing your income streams, investments, and family finances may help to manage this impact.
- High Income Child Benefit Charge (HICBC): It was announced that the government will not proceed with the reform to base the HICBC on household incomes. To make it easier for all taxpayers to get their HICBC right, the government will allow employed individuals to pay their HICBC through their tax code from 2025 as well as pre-prepopulating Self-Assessment tax returns with Child Benefit data for those not using the tax code service.
- Private School VAT: Labour’s addition of VAT on private school fees, effective January 2025, represents a 20% increase in education costs. Families should consider this added cost in their financial plans, particularly those with children in or soon to attend private schools.
Inheritance Tax: What You Need to Know
The recent Budget confirms that Inheritance Tax (IHT) thresholds will remain frozen, impacting those planning to pass on wealth, particularly property, to future generations. Here’s an overview of the current IHT landscape and what these changes mean:
- Threshold Freeze: The IHT nil-rate band, which has been set at £325,000, remains frozen, as does the residence nil-rate band at £175,000. This freeze, while maintaining thresholds, could lead to larger tax bills as property and asset values increase over time, bringing more estates into the IHT net.
- Residence Nil-Rate Band: This additional allowance applies when a primary residence is passed to direct descendants, providing an additional £175,000 exemption. For families passing on homes, this means up to £500,000 of the estate can remain tax-free under current rules.
- Tax Rate: Estates above these thresholds will continue to be taxed at 40%, meaning that proper planning is essential to avoid potentially large IHT bills.
- Implications for Families: With thresholds unchanged, individuals and families may need to consider IHT planning options, such as making regular gifts within allowable limits, setting up trusts, or using life insurance policies to mitigate potential IHT liabilities.
Inheritance Tax Changes for Farmers: Updates to Agricultural Property Relief
The latest Budget introduces substantial changes to Agricultural Property Relief (APR), tightening its application and altering how farming assets are transferred to future generations tax-efficiently. These updates mean family farms will need to meet stricter standards to qualify, which could affect estate planning significantly.
Key Changes to Agricultural Property Relief
1. Stricter Eligibility Requirements: Starting in April 2025, APR will be granted only to farms demonstrating consistent agricultural operations. This includes documented activities like regular livestock management, crop rotation, or other evidence of active farming. Passive landholdings—where little to no ongoing farming occurs—may no longer qualify. This adjustment is designed to ensure APR primarily benefits active farming businesses.
2. Specificity of Agricultural Use: The criteria for “agricultural use” are becoming more narrowly defined. For instance, land leased to third parties may no longer meet APR qualifications under the revised rules, as the activity must be directly involved in farming by the owner. This change could impact many farmers who lease sections of their land to other operators, prompting a need to re-evaluate these agreements and potentially explore options like joint ventures to maintain eligibility.
3. Reduced Relief on Non-Agricultural Elements: Properties on farming estates that don’t contribute directly to agricultural production, such as certain residential buildings or non-farming structures, will no longer receive full APR. Estates with diverse holdings may need to separate these assets or adjust their structure to ensure they optimize the relief available for qualifying agricultural assets.
Planning Considerations for Farmers
With these updates, it’s crucial for family farms to take a proactive approach to estate planning. Here are some recommended steps:
- Maintain Thorough Records of Agricultural Activities: For APR eligibility, keep comprehensive logs detailing farming practices, including livestock care, crop schedules, and land improvements. Such documentation will be essential for demonstrating that the farm meets active use requirements.
- Reassess Leasing Arrangements: Since third-party leases may no longer meet APR criteria, landowners should review leasing contracts and understand how they might impact relief eligibility. Alternative structures, like joint ventures, may help landowners retain some operational involvement, which could align with APR’s new requirements.
- Review and Adjust Estate Structure: As APR benefits become less accessible for non-farming elements, reevaluating the estate’s structure can help families make informed choices about asset allocation. Separating agricultural from non-agricultural components can aid in planning and potentially safeguard qualifying assets for APR.
These changes, set to take effect in 2025, emphasize the need for detailed documentation and careful planning. By taking these steps, family farms can better prepare to leverage APR, reducing inheritance tax burdens where possible and securing assets for future generations.
