_edited.png)
UK Budget 2024
The UK Autumn Budget 2024 marked a significant shift as Chancellor Rachel Reeves presented the Labour party's first budget in 14 years, addressing fiscal challenges and laying out comprehensive tax reforms. The changes are set to impact businesses, high-net-worth individuals, and everyday taxpayers, prompting immediate financial planning and adjustments.
Here's a breakdown of the 13 most impactful measures and what they mean for individuals and businesses, highlighting the need for proactive planning to safeguard finances and optimize tax outcomes.
1. Abolition of the Remittance Basis and Introduction of the FIG Regime
What This Is: The UK government will abolish the remittance basis of taxation for non-domiciled residents starting on April 6, 2025. This system allowed non-domiciled individuals to only pay UK tax on the income they brought into the country, keeping their foreign income and gains outside the scope of UK tax. In its place, the FIG (Foreign Income and Gains) regime will be introduced, which allows new arrivals to pay tax only on UK-sourced income and gains for a four-year period.
Explanation: Under the new FIG regime, individuals who have not been UK tax residents for the past 10 tax years can claim to be taxed only on UK-sourced income and gains for four consecutive years. After this period, their worldwide income and gains will be subject to UK tax.
Scenario: Sarah, a successful entrepreneur from Canada, moves to the UK in 2026 after living outside of the UK for over 15 years. Under the FIG regime, for her first four years in the UK, she only pays UK tax on income and gains generated within the UK. This initially helps Sarah as she can retain her foreign investments and overseas business income tax-free in the UK. However, after four years, all her foreign earnings become subject to UK taxation, which is a significant change from the previous system that allowed up to 15 years of tax protection on foreign income.
Impact: The FIG regime offers a limited, four-year tax break to newcomers, which can make the UK attractive in the short term for individuals like Sarah. This gives them time to settle in the country and manage their financial plans without the burden of immediate global tax obligations. However, the change from a potential 15-year period under the old remittance basis to only four years may discourage wealthy individuals and investors from considering a long-term stay in the UK. This could lead to fewer high-earning professionals relocating to or remaining in the UK, affecting investment and business decisions that rely on longer-term tax reliefs.
2. Residence for Inheritance Tax (IHT) Purposes
What This Is: The centuries-old concept of domicile for IHT purposes will be abolished and replaced by a residence-based system starting April 6, 2025. Instead of relying on domicile status, the new rule will determine IHT liability based on how long an individual has been a UK tax resident.
Explanation: Under the new system, if a person has been a tax resident in the UK for 10 out of the last 20 years, their entire estate, including foreign assets, will be subject to UK IHT. If they leave the UK, they may continue to be liable for IHT for a certain period, depending on the duration of their stay.
Scenario: John, a retired executive from the US, has lived in the UK for 12 years. He decides to move back to the US in 2027. Under the new residence-based rules, John's estate will remain subject to UK IHT for three more years after he leaves, because he has lived in the UK for more than 10 years but less than 14 years. Previously, John could have potentially avoided IHT based on his domicile status, but now his estate will be exposed due to his long-term residence.
Impact: This change means that long-term residents in the UK will face increased exposure to UK IHT on their worldwide assets. People like John, who may have planned to leave the UK, will have to consider the "tail period" of IHT liability that follows them even after they leave the country. This could lead to careful financial planning or even discourage individuals from residing in the UK for long periods due to potential future tax obligations on their estates.
3. The End of Protected Trust Status
What This Is: From April 6, 2025, protected trust status will be removed. This status previously allowed individuals who set up offshore trusts to avoid direct UK taxation on the trust's income and gains, as long as they didn’t bring those funds into the UK.
Explanation: Under the current system, people could establish trusts to hold foreign assets and delay or avoid UK tax on any gains or income unless those funds were brought into the UK. Starting in 2025, if the person who set up the trust (the settlor) is a UK tax resident, they will have to pay tax on the trust’s income and gains as they arise, regardless of whether the income stays offshore.
Scenario: Emma, an investor, created a trust in Switzerland to hold assets and generate income for her grandchildren. Under the old system, Emma didn’t have to pay UK tax on the trust’s income unless it was remitted to the UK. Now, with the abolition of protected trust status, Emma, if she becomes or remains a UK tax resident, will have to pay UK tax on the income and gains within the trust each year, even if the money stays in the Swiss trust.
Impact: The removal of protected trust status increases tax obligations for UK residents who have offshore trusts. For individuals like Emma, this change means that trusts set up for wealth management or estate planning purposes will be less effective at shielding income and gains from UK tax. This could lead to higher taxes for high-net-worth individuals and prompt them to reconsider moving or staying in the UK. It also adds complexity to managing such trusts and could deter some from using them as part of their financial strategy.
4. IHT and Trusts
What This Is: The rules governing inheritance tax (IHT) for trusts will be revised from April 6, 2025. Instead of relying on the settlor’s domicile status at the time the trust was created, IHT treatment will depend on whether the settlor has been a long-term UK resident.
Explanation: Trusts set up by non-UK domiciliaries before they become deemed domiciled were previously outside the scope of IHT for the settlor's lifetime and at their death, provided they did not include UK assets. Under the new rules, a trust will be within the IHT “relevant property regime” if the settlor is a long-term UK resident (defined as having been UK tax resident for 10 out of the last 20 years). If the settlor ceases to be UK resident, the trust could exit the relevant property regime, but an “exit charge” may apply.
Scenario: Michael, an Italian businessman, set up a trust in 2010 while he was non-domiciled and living outside the UK. He moved to the UK in 2016 and stayed for over 10 years. Under the new rules, from 2025, his trust will be subject to IHT charges because he is considered a long-term resident. If Michael leaves the UK after 2025, the trust could leave the relevant property regime, but an exit charge might apply based on when the trust last had its 10-year anniversary.
Impact: These changes mean that individuals like Michael will face IHT on their trust assets if they are long-term UK residents. Trusts previously protected from IHT might now fall under the regime, leading to potential charges during 10-year anniversaries or when trust assets are distributed. This could increase tax planning complexity and affect individuals’ decisions to establish or maintain trusts while residing in the UK.
5. Temporary Repatriation Facility (TRF)
What This Is: The TRF is a special tax measure that allows former users of the remittance basis to bring unremitted foreign income and gains to the UK at a reduced tax rate. This facility will start on April 6, 2025, and last for three years, with a flat 12% tax rate in the first two years, increasing to 15% in the third year.
Explanation: The TRF enables individuals who used the remittance basis (which shielded their foreign income from UK tax) to bring that money into the UK at a much lower tax rate than the standard. This applies to income and gains accrued in the past and includes distributions from offshore trusts that are matched to historic income or gains.
Scenario: Laura, a former non-domiciled resident who used the remittance basis to avoid UK tax on her overseas investments, considers bringing those funds into the UK to invest in property. Under the TRF, she can bring this money at a 12% tax rate for the first two years starting in April 2025, or at 15% in the third year. This is beneficial compared to standard tax rates, allowing Laura to make financial moves in the UK while paying a lower tax rate.
Impact: The TRF provides a unique opportunity for individuals like Laura to move significant overseas funds to the UK with reduced tax implications, encouraging investment and potentially boosting the UK economy. However, this is only temporary, so individuals will need to act within the three-year window to benefit.
6. IHT Reliefs for Business and Agricultural Property
What This Is: Starting April 6, 2026, inheritance tax (IHT) reliefs for business and agricultural property will be capped. Previously, these properties could receive 100% IHT relief with no upper limit. Now, the relief will be capped at £1 million in combined value for such assets, with any value above that being eligible for only 50% relief.
Explanation: Business owners and farmers currently benefit from significant IHT relief on their property, allowing them to pass down their business or agricultural land without IHT. The change means that only the first £1 million in combined value will get full relief, and anything above that will face a reduced 50% relief, leading to an effective IHT rate of 20% on the excess.
Scenario: Thomas, a farmer, owns agricultural property valued at £2 million. Under the current system, his heirs would not pay IHT on the full value of the property. From April 2026, only the first £1 million will get 100% relief, and the remaining £1 million will be subject to 50% relief. This results in his heirs facing a 20% IHT rate on the excess £1 million.
Impact: The change will affect business owners and farmers like Thomas, who previously benefited from full IHT relief on high-value assets. This could lead to financial strain for heirs who might need to sell parts of the business or land to cover the IHT. It adds pressure on owners to plan carefully for succession and might reduce the overall appeal of holding large agricultural or business properties as part of long-term estate planning.
7. CGT (Capital Gains Tax) Changes
What This Is: Capital Gains Tax (CGT) rates will be increased starting October 30, 2024. The new rates will be 18% for basic rate taxpayers and 24% for higher rate taxpayers. CGT on residential property will remain at 24%, while rates for Business Asset Disposal Relief and Investors' Relief will also be raised.
Explanation: CGT is applied when individuals sell assets, such as property or shares, and make a profit. The increase means that people will pay more tax on the profit they make from these sales.
Scenario: Rachel, who sells a rental property she owns, will be affected by the new CGT rate. If she sells the property after October 30, 2024, and makes a profit of £100,000, she will now pay 24% in CGT rather than a lower rate. This will result in a CGT bill of £24,000, making it more costly for her compared to previous rates.
Impact: The increase in CGT rates means that property owners, investors, and business owners will see higher tax bills when selling assets. This may lead individuals to reconsider the timing of their sales or even hold on to assets longer to avoid the higher tax rate. The higher rate for Business Asset Disposal Relief and Investors’ Relief may also impact entrepreneurs and investors, potentially reducing the incentive for certain types of business sales or investments.
8. Carried Interest
What This Is: The taxation of carried interest (the share of profits from investment funds that managers receive) will change. From April 2026, all carried interest will be taxed under the income tax framework, with a 72.5% multiplier applied to calculate the taxable amount. As an interim measure, CGT rates for carried interest will rise to 32% from April 6, 2025.
Explanation: Currently, carried interest can be taxed at CGT rates, which are lower than income tax rates. The new rules mean carried interest will effectively be taxed at a higher rate, aligning closer with income tax, which is up to 45%.
Scenario: Mark, an investment fund manager, earns carried interest from his fund. Under the current CGT system, he would pay 28% tax. After April 2026, with the new rules, Mark's carried interest will be taxed under income tax, potentially pushing his tax rate to around 32.5% or more. This increases his overall tax burden on profits earned.
Impact: The change in how carried interest is taxed will significantly impact fund managers and investment professionals like Mark, who could see their tax rates rise. This may reduce the attractiveness of working in the UK for fund managers or lead to changes in the structuring of investment funds to manage tax exposure. The higher rates could also impact the overall profitability of funds, potentially altering how investments are made.
9. Stamp Duty Land Tax (SDLT) Changes
What This Is: The SDLT surcharge for buying additional residential properties will increase from 3% to 5%, effective from October 31, 2024. The single rate SDLT for corporate bodies purchasing properties over £500,000 will also rise from 15% to 17%.
Explanation: SDLT is a tax on property purchases, and the surcharge applies to those buying additional properties (such as second homes or buy-to-let properties). The increase will make it more expensive to purchase these types of properties.
Scenario: Alice, who is looking to buy a second property as an investment, will now face an extra 5% SDLT surcharge on top of the standard SDLT rates. If she purchases a property for £600,000, she will pay an additional £30,000 in surcharge alone, compared to the £18,000 she would have paid under the previous 3% rate.
Impact: The increase in SDLT surcharge makes buying additional properties more expensive for investors and those looking to buy second homes. This may lead to fewer property purchases in the buy-to-let market, impacting landlords and investors like Alice. It could potentially reduce competition in the housing market for first-time buyers, but it might also slow down investment in residential properties, affecting rental supply and housing availability.
10. VAT on School Fees
What This Is: Starting January 1, 2025, private school fees in the UK will be subject to VAT at the standard rate of 20%. Private schools will also be brought within the scope of business rates for the first time.
Explanation: VAT is a tax added to goods and services, and applying it to private school fees means that parents will need to pay 20% more for their children's private education.
Scenario: The Smiths, who currently pay £20,000 a year for their child’s private school, will face an increase of £4,000 in fees due to the new VAT, making their total payment £24,000 per year. This added cost could make private schooling unaffordable for some families.
Impact: The new VAT on private school fees will affect families like the Smiths who send their children to private schools, potentially leading to a shift of students to public schools if costs become prohibitive. This could increase demand on the state education system. On the other hand, it raises revenue for the government and aligns private education with other taxed services.
11. Corporate Tax Roadmap and Business Rates
What This Is: The Corporate Tax Roadmap ensures that the corporate tax rate will remain at 25% for the duration of the current Parliament. Additionally, there will be a series of adjustments to business rates, including differential multipliers for properties valued above and below £500,000.
Explanation: The stability in corporate tax means that businesses can plan their financial strategies without worrying about immediate changes to the rate. However, adjustments to business rates mean that larger properties will face higher taxes, while smaller shops and businesses may benefit from lower rates.
Scenario: A large department store in central London with a high rateable value will see an increase in business rates, which could result in higher operational costs. Conversely, a small café with a lower rateable value in a smaller town may see reduced rates, allowing it to save on costs.
Impact: Keeping the corporate tax rate steady at 25% provides certainty for businesses, which helps with financial planning. However, large businesses, especially those with expensive properties, will pay more in business rates, potentially impacting their profitability. On the other hand, smaller businesses could benefit from reduced rates, aiding their growth and sustainability.
12. Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs)
What This Is: New rules will require shares transferred into an Employee Ownership Trust (EOT) to be held for at least two years before benefiting from the inheritance tax (IHT) exemption. These changes take effect from October 30, 2024.
Explanation: EOTs and EBTs are structures that allow employees to own shares in a company, and they come with various tax benefits. The new rule ensures that shares must be held for a minimum of two years before qualifying for IHT relief, aimed at preventing tax abuse while still promoting employee ownership.
Scenario: A company, ABC Ltd, plans to transfer shares to an EOT to give its employees ownership stakes. Under the new rule, the shares must be held in the trust for at least two years before the transfer qualifies for the IHT exemption. This adds a waiting period before the full tax benefits can be realized.
Impact: Companies using EOTs as part of employee ownership plans will need to adjust their timelines to ensure compliance with the new two-year rule. While this change may discourage short-term, tax-driven transfers, it still allows genuine employee ownership benefits to continue. It maintains the tax benefits for long-term plans, ensuring that the spirit of EOTs—promoting employee ownership and rewarding employees—remains intact.
13. Tax Crackdowns
What This Is: The government plans to bolster HMRC (Her Majesty’s Revenue and Customs) with more resources and improved data capabilities to tackle tax evasion and non-compliance. This includes enhanced use of data from the Register of Overseas Entities and improvements to the Worldwide Disclosure Facility, which allows taxpayers to declare and correct their tax affairs.
Explanation: This measure is part of the government's commitment to closing the "tax gap"—the difference between the amount of tax that should be collected and what is actually collected. It means increased scrutiny and enforcement against individuals and businesses that may be avoiding or underreporting their tax liabilities.
Scenario: David, who has investments abroad that were not previously disclosed to HMRC, could be flagged for review under the new data-driven approach. If discrepancies are found, he may face fines or penalties. Similarly, companies that use complex structures to minimize taxes might come under closer examination, risking audits and potential fines.
Impact: This crackdown affects individuals and businesses that have used aggressive tax strategies or failed to fully disclose their financial positions. It may push people like David to regularize their tax status proactively to avoid penalties. For compliant taxpayers, these measures mean a more level playing field, as they aim to ensure that everyone pays their fair share. Businesses may need to be more transparent and thorough with their tax reporting, possibly increasing administrative efforts but promoting fair competition and trust in the tax system.
If you have any questions on navigating this budget and optimizing tax strategies for your business or personal finances—including tax planning, accounting, deductions, or any other financial concerns—reach out to PKPI Chartered Accountants. Visit us at www.pkpi.uk/contact-us or schedule a consultation at www.calendly.com/gagan-singh. Our team of experts is ready to assist you with tailored advice, helping you stay informed and prepared in the ever-changing tax landscape.
Frequently Asked Questions
Why should I use my ISA allowance now?
Using your ISA allowance is more important than ever because the limit of £20,000 a year is fixed until 2030. With the recent increase in CGT rates, putting your investments in an ISA allows you to avoid tax on capital gains and keep all your profits. For example, if you make a £15,000 profit on shares outside an ISA, you’d face a CGT bill of up to £2,880, but inside an ISA, you’d keep the full amount.
What is the bed and ISA process, and how does it help?
Why is it important to hurry up with my property purchase?
How do the new stamp duty rules affect first-time buyers?
Should I rush to remortgage my property?
How will changes to pension inheritance tax (IHT) impact me?
What should I consider if I plan to withdraw pension savings early?
How can salary sacrifice schemes benefit me after the budget changes?
What’s the impact of the scrapped change to the child benefit tax charge?
Why is it essential to review life insurance and pension plans now?
Comments