In the run up to the Budget the overwhelming call from business was for certainty and stability to enable long-term strategic decisions to be made and investment confidence to build. The key question for business now as it works through the Budget measures is whether this has been achieved and whether the UK is now a more or less attractive place to do business.
Coming into the Budget the Chancellor had little room for manoeuvre as she had committed not to raise income tax, VAT, the main rate of corporation tax or employee NICs. It is therefore not surprising that she has focussed her fire where she did.
Given the need for the UK to remain attractive for international business, the Chancellor’s publication of a Corporate Tax Road Map setting out her plans is to be welcomed. In it, she confirmed both that the main rate of corporation tax is to stay at 25 per cent, and that she did not expect to make major structural changes to the taxation of companies subject to UK tax.
The one major change that will affect businesses is the increase in employers’ National Insurance contributions which will increase from 13.8 per cent to 15 per cent for the 2025/26 tax year.
That left the primary focus of the Budget to be how individuals are taxed. Top of the list of areas open for change was capital gains tax. Whilst historically often lower than income tax rates due to the operation of reliefs such as taper relief and indexation relief, the significant divergence in capital gains and income tax rates has become more pronounced since 2008. The change in the capital gains tax rate for higher rate taxpayers from 20% to 24% aligns capital gains tax on share disposals with disposals of residential property which remain at 24%. The change has immediate effect for disposals made on or after 30 October 2024, including some disposals that had been unconditionally agreed (but not completed) before that date. Whilst the increase is not as high as many feared, the blunt rate change without any tapering or reduced rate for assets held longer term will be viewed as unfair by some as it means the taxation system takes no account of the effect of inflation on asset values.
This rate differential is made greater by reliefs such as Business Asset Disposal Relief (BADR) aimed at fostering entrepreneurial activity and investment in owner managed businesses. BADR has been a valuable relief. It currently applies a 10% rate on capital gains up to a lifetime limit of £1 million provided a person owns a 5% interest for at least two years prior to disposal and is an employee or officer of the company. The BADR rate will rise to 14% for disposals made on or after 5 April 2025 and to 18% for disposals made on or after 6 April 2026.
A further announcement for capital gains tax was the increase of capital gains tax rates on carried interest to 32% from April 2025. Further reforms are then planned to be effective from April 2026 with the intention of bringing carried interest into the charge to income tax.
Proposals for changes to the taxation of non-UK domiciled individuals were announced by the Conservative government at Spring Budget earlier this year. The current Labour government confirmed that it would continue with the proposal to abolish non-domicile status for income and capital purposes with effect from 6 April 2025 and published a policy paper setting out those areas of the original proposals it would change.
We now have their firm proposal. The new regime will provide 100% relief for the first four years for new arrivals to the UK provided they have not been UK tax resident at any point in the 10 years up to their arrival. The temporary repatriation facility, enabling foreign income and gains (FIG) earned personally to be remitted at a reduced rate, will be available for three years from 2025, with a rate of 12% for the first two years and 15% for the final tax year. Rebasing of foreign assets for individuals who are or have been remittance basis taxpayers will be to April 2017 with an option to elect out of rebasing. Less welcome will be the fact that UK inheritance tax will continue to apply for a number of years after a person has ceased to be UK resident; how long depends on the previous period of non-residence.
A number of changes to pensions legislation were announced in the Budget, although neither the limiting of tax-free lump sums or the reduction of pension tax relief on contributions materialised.
The principal change for defined contribution pensions savers is that with effect from April 2027, unused pension pots will be brought into scope for inheritance tax purposes. In perhaps a surprise move, it is proposed that lump sums payable on death from DB schemes will also be caught, whether or not paid at the discretion of trustees, bringing these benefits more in line with the treatment of public sector schemes.. The IHT threshold remains fixed at £325,000 (and £500,000 for those leaving their private residence to a direct heir). This will mean that many more estates are likely to be subject to IHT in future. A twelve week consultation will run to 22 January 2025.
