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As all good Greek philosophers or US presidents know, there are moments for original thinking and also times to rely on securely held beliefs. After all, we all know there are only three things in life that are certain: death and taxes (to quote Benjamin Franklin) and thirdly, that HMRC continues to consider cars as a wasting asset and therefore exempt from capital gains tax … at least for now!
This article, written by Nick Gornall from Weatherbys Private Bank and an enthusiastic HWM client, is not intended to comment on political ideology nor to speculate on future tax rates. It is, however, intended as a helpful tick list to a financial health check on your own affairs and an invitation to have a conversation if that would be helpful.
My starting position on the current state of play with financial planning is that there are many things that have changed and hence prompt further consideration, but there are also many things that have stayed the same and hence should not be overlooked as we enter a new year and consider putting our affairs in best order.
On 30th October 2024, the Chancellor of the Exchequer delivered her first Budget. The Budget had been the subject of much speculation, and subsequently much outrage and protest, and indeed in some areas we are still limited in detail around the exact implementation approach. In the meantime, here is an initial take on the Budget tax measures as we expect them to affect our clients.
Much of the speculation around the Budget measures had been driven by the Labour party’s commitment not to raise the three ‘big’ taxes of income tax, national insurance and VAT. We now know that the main changes will impact national insurance, capital gains and inheritance taxes.
Owner managed businesses – employers’ national insurance contributions (NICs)
NICs featured as the major source of the Chancellor’s £25bn of tax revenue, albeit in the guise of employers’ rather than employees’ national insurance.
The proposal is that the rate of employers’ NIC will rise from 13.8% to 15%. Additionally, the employee salary threshold at which employers have to start paying NICs goes down from £9,100 to £5,000. There is now regular commentary about the impact this move will have on employer behaviour, but for owner managed companies it will affect decisions on how owner directors extract funds. Taking a bonus will result in payroll taxes, including employers’ NIC on the bonus, but this would give rise to a deduction for the bonus and NIC against corporation tax. On the other hand, taking a dividend gives no relief for corporation tax purposes but personal tax is at the dividend rates which are generally lower than the main income tax rates.
For a long time the combination of a low corporation tax rate and lower dividend rates meant that owner managers were best advised to extract funds from companies by way of a small salary with the balance in dividends. The increase in corporation tax to 25% last year changed that dynamic, as the corporation tax relief for the payroll costs became more valuable. Along with recent increases in dividend tax rates, this usually gives bonuses the edge over dividends for higher taxpayers. As we move into a new tax year in April, increasing the employers’ NIC rate and lowering the starting threshold will change the position again and so it makes sense for you or your accountant to check the tax and NIC impact before you decide between bonuses and dividends. In any event, the Chancellor has confirmed that corporation tax is to be capped at 25% for the duration of the current parliament and the present regimes for capital allowances and research and development are to be maintained so business owners can look forward to some stability.
Capital gains tax (CGT)
For CGT we did see an increase but happily not to the same rates as income tax, as had been predicted by some. There was an immediate increase in the lower rate of CGT from 10% to 18% and the higher rate goes up from 20% to 24%. The new thresholds match the residential property rates, which are unchanged.
Business asset disposal relief, formerly known as Entrepreneurs’ Relief, has allowed business owners making a disposal of business assets to access a lower rate of 10% CGT on the first £1m of their gains. A similar relief is available for angel investors. The 10% CGT rate is to rise to 14% from 6 April 2025 and to 18% from 6 April 2026. While anyone disposing of a business asset will be grateful for relief, the business asset disposal relief threshold had already been reduced, so it was worth £100k in tax terms prior to this announcement. That value now reduces to £60k from April 2026, which is the lifetime limit of £1m gains at 6%, this being the difference between 18% and the new top rate of 24%.
There was no change to the treatment of CGT on assets which are considered ‘wasting assets’ with a useful life of 50 years or less which fall outside the CGT regime. Clearly there are many cars still on the road after 50 years, but broadly speaking, cars are mechanical structures which deteriorate over time and are not expected to last that long. Consequently, cars are considered wasting assets and are exempt from CGT. That might sound good, but it also means that losses from car sales are not allowable. As most cars are sold at a loss, you can see why the CGT exemption continues to make sense from the Chancellor’s point of view.
Inheritance tax (IHT)
While the Chancellor suggested that IHT only affects some 6% of estates, her measures are likely to ensure that that percentage rises. The nil rate band threshold has been £325,000 since 2009 and is now set to remain frozen until 2030. Estates have therefore already been subjected to a significant element of fiscal drag over the last 15 years, albeit estates worth £2m or less do also qualify for a residence nil rate band of £175,000.
Business property relief and agricultural property relief have been immensely valuable to business owners and farmers, offering up to 100% protection on the value of qualifying assets without a cap. This is to change, with the 100% rate of relief continuing for the first £1 million of combined agricultural and business assets to help protect family farms and businesses, and relief will be cut to 50% on any excess. The reliefs were designed to ensure that families were not forced to sell their business assets in order to pay the IHT, so the new system undermines the concept of generational businesses and, in particular, farms. The new rates operate for deaths after 5 April 2026 and the small print notes that this will include lifetime gifts on or after 30 October 2024 where the donor dies after 5 April 2026. Clearly for those wanting to pass a significant family business or farm down the generations, this raises the spectre of liquidity problems in order to pay the IHT. An instalment regime will be brought in to enable the IHT to paid over 10 years in certain circumstances.
The business property relief for AIM shares which are designated as unlisted for IHT purposes is also to be restricted to 50%.
Pensions
A widely predicted measure which did appear in the Chancellor’s Budget was to bring unspent pension pots into the IHT net, undoing part of a former Chancellor, George Osborne’s, pension freedom reforms in 2015. Since then, received estate planning wisdom has been to spend down other funds in retirement, leaving the IHT-free pension pot for your beneficiaries to inherit IHT free. Given that the tax reliefs attached to pensions are designed to allow taxpayers to fund their old age rather than their children’s inheritances, this move is unsurprising. It takes effect from April 2027, which implies that it needs some detailed thought, possibly around the interaction between the IHT and income tax which beneficiaries of an inherited pension pot would pay when drawing down funds from that pension.
Property taxes
While CGT remains unchanged on residential property sales, stamp duty land tax (SDLT) is going up with an immediate increase from the 3% surcharge on the purchase of second homes to 5%.
Non-domiciles
The previous Chancellor, Jeremy Hunt, began reform of the tax regime for non-UK domiciles in spring 2024, but the new Chancellor has gone further and has formally abolished it from 6 April 2025. She proposes to introduce a simpler residence-based regime, which will take effect from 6 April 2025 and allow temporary residents to avoid UK tax on their foreign income for the first four years of UK residence. This involves extending the ‘temporary repatriation facility’ for one year to funds repatriated over a three-year period. It’s clear that Labour has been unhappy with the use of offshore trusts to shelter assets from IHT and it now plans to introduce a residence-based IHT scheme as well. The test for whether non-UK assets are in scope for IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises.
Wealth management checklist
While it was a long run into the new Chancellor’s first budget, and there has been much news and comment coming from the groups most impacted, specifically pensioners, farmers and employers, things could have been worse! Yes, some of our clients will need to rethink their approach to sourcing funds for spending in retirement, and owner managers will need to consider again how they extract funds from their companies. And farm and business owners are to be faced with IHT problems not seen for generations.
It is worth reflecting that not everything has changed, though, and a few helpful planning opportunities do remain and should be part of any good wealth management overview. These include:
So while everything appears to have changed or indeed could change in the future, the one thing that remains constant is the need to undertake fresh financial planning with good advice. The golden rule is to review your affairs including your will, wealth statements and investments at least every three years. If a second opinion is worthwhile, please do feel free to get in touch.
Tax laws are subject to change and taxation will vary depending on individual circumstances
Investments can go up and down in value and you may not get back the full amount originally invested
Weatherbys Private Bank is a trading name of Weatherbys Bank Ltd and is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.