Autumn Budget – 30 October 2024

Rise in Capital Gains Tax Rate

Having been one of the most speculated areas for change, the government announced increases to capital gains tax rates with immediate effect for disposals on or after 30 October 2024 as follows:

• The rate applicable to basic rate taxpayers increases to 18%, from the existing 10%.
• The rate applicable to higher rate taxpayers increases to 24%, from the existing 20%.
• The rate applicable to gains accruing to trustees and personal representatives increases to 24%, from the existing 20%.

This brings the CGT rate on most assets (see exceptions below) in line with the rates previously in effect for residential property.

Other CGT changes include:

• The rate applicable to Business Asset Disposal Relief and Investor’s Relief will increase to 14% for qualifying disposals on or after 6 April 2025, from the existing 10% rate. The rate will further increase to 18% for disposals made on or after 6 April 2026.
• The Lifetime Allowance for Investor’s Relief will reduce from £10million to £1million for disposals on or after 30 October 2024
• The rate applicable to carried interest distributions increases to 32%, with effect from 6 April 2025 (discussed further below).

Anti-forestalling

Rules will be introduced in respect of unconditional and uncompleted contracts entered into before 30 October 2024, such that the new rates will apply unless it can be demonstrated that the contract was entered into for wholly commercial purposes and the timing to effect the contract was not for tax advantage purposes.

Further anti-forestalling rules apply in cases where an election is made to disapply the CGT share re-organisation provisions for the purposes of claiming business asset disposal relief.

Inheritance Tax (IHT)

IHT had been subject to much media speculation in the run up to the Budget, with potential changes such as introducing IHT on lifetime gifts, extending the 7 year tail for lifetime gifts, abolishing Agricultural Property Relief (APR) and/ or Business Property Relief (BPR), reducing the Residence Nil Rate Band and bringing pensions within the scope of IHT being bandied around.  Thankfully, not all of these have been adopted by the government. However, there are changes which are likely to lead to much higher IHT bills for many clients in the future.

Nil Rate Band

The Nil Rate Band for IHT had already been frozen at £325,000 until 5 April 2028, and this has now been extended to 5 April 2030.

The Residence Nil Rate Band, which is an additional nil rate band of £175,000 available to estates valued at up to £2million, tapering by £1 for every £2 in excess, survived the government’s raid on taxes (albeit also frozen until 5 April 2030), which will be welcome news to many. This additional Nil Rate Band is available when the estate passes on a qualifying residence to a direct descendant. 

Pensions 

Less welcome news will be the inclusion of most pension funds and death benefits within the value of a person’s estate from 6 April 2027.  The government believes that pensions are being used as a tax planning tool to pass wealth down the generations outside the scope of IHT, rather than for their intended purposes – saving for retirement.  There has been speculation that the income tax and National Insurance reliefs for pension contributions might be withdrawn, but these have been left in place.

Currently, there is a discrepancy between discretionary (most schemes) and non-discretionary pension schemes, whereby discretionary schemes are outside the estate for IHT, but non-discretionary schemes are within it.

From 6 April 2027 the difference in treatment will be removed, and both Defined Contribution and Defined Benefit schemes will be included in the estate for IHT.  The rules will apply equally to UK-registered schemes and QNUPS.

A small number of specified pension benefits are outside the scope of IHT for non-discretionary schemes under the current rules, and will remain so for all schemes under the new rules.

No legislation has yet been published, and a technical consultation has been launched into the processes required to implement these changes for UK-registered pension schemes.  A second technical consultation will also be carried out when draft legislation is published next year.

The liability for the tax will fall on the scheme administrators, and therefore paid from the pension funds directly to HMRC.  The nil rate band will be apportioned between the pension and the other assets within the deceased’s estate, with IHT charged on the excess.

Currently, where an individual dies under the age of 75, a discretionary pension scheme passes free of both inheritance and also income tax, when the beneficiary draws down the pension funds.  If the individual dies aged 75 or older, although a discretionary pension scheme passes free of inheritance tax, the beneficiary is subject to income tax at their marginal rate on any drawdowns.  The worked case studies in the technical consultation suggest this income tax treatment will persist – therefore where an individual dies aged 75 or over, there will be an IHT charge calculated on the value of the pension net of available nil rate band at 40% on death, and then income tax charged on the beneficiaries at their marginal rates on drawdown.

The marginal rate on drawdowns could be at 40% or 45%, giving a potential maximum effective tax rate of 67% for an additional rate beneficiary.

Business Property Relief (BPR)/ Agricultural Property Relief (APR)

Although not a surprising change, the impact of the reform to BPR and APR will been keenly felt by many farmers and business owners, and we envisage that many farms and businesses will struggle to be passed down the generations without being broken up. How this can be reconciled with a manifesto which recognised that “food security is national security” is yet to be seen.

With effect from 6 April 2026 (subject to anti-forestalling as outlined below), a single £1million allowance will be applied to the combined value of property in an estate qualifying for business property relief at 100% and agricultural property relief at 100% (“qualifying property”).  The allowance covers the following transfers:

• Property in the estate at death
• Lifetime transfers in the 7 years before death (a failed potentially exempt transfer, or PET)
• Chargeable lifetime transfers (for example transfers into trust)

Certain assets currently only qualify for APR or BPR at 50% (such as controlling holdings in quoted companies), and these remain unaffected by the new £1million allowance.

Qualifying property in excess of the £1million allowance will receive relief at 50%, therefore suffering an effective 20% tax rate.

There has long been speculation that BPR will be withdrawn for shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.  It may therefore come as welcome relief that AIM shares will continue to benefit from BPR, albeit that relief will be restricted to 50%, as AIM shares will not be qualifying property for the £1million allowance.

Trusts will also benefit from a £1million allowance on the value of qualifying property to which 100% relief applies, on each ten-year anniversary charge and exit charge.  Where settlors have created more than one trust before 30 October 2024, each trust will benefit from its own £1million allowance. However, where multiple trusts are settled on or after 30 October 2024, the £1million allowance will be allocated between the trusts, although the mechanism for allocation is to be confirmed.

In addition, anti-forestalling is to be introduced such that the new rules apply to lifetime gifts on or after 30 October 2024 if the donor dies on or after 6 April 2026, such that the failed PET will be subject to the £1million allowance.  There does not appear to be any anti-forestalling in relation to transfers into trust between 30 October 2024 and 5 April 2026, provided the settlor survives 7 years from the date of the gift. This might therefore provide an opportunity to settle APR or BPR qualifying assets on trust before 6 April 2026.

Although there will be concerns for many landowners and business owners that there will not be sufficient liquidity within their estates to pay the IHT due on the value in excess of the £1million allowance, the IHT can be paid in 10 equal instalments over 10 years, and interest will not be charged on the instalments provided they are paid on time. A very small relief against what will otherwise no doubt be a serious concern for those affected.

Non-domiciled individuals

Since the previous government’s announcement of their intention to abolish the concept of domicile, much discussion has been had as to the exact form its replacement would take. Although the residence-based outcome is similar to that previously trailed, the Budget has confirmed a dramatic increase in HMRC’s information gathering capability, and taxpayers’ administrative burden, particularly for those who intend to reside only temporarily in the UK.

Foreign income and gains (FIGs)

The current remittance basis regime available to non-doms in relation to income and capital gains will be replaced with the previously proposed four-year FIG regime.  The regime will be available to new arrivals to the UK and to individuals who become UK resident after a period of ten consecutive years of non-UK residence.

Individuals claiming under the new regime will not pay any tax on their foreign income or gains for the first four years after becoming UK resident (irrespective of any periods of non-UK residence in that window) and will be free to bring any FIGs into the UK without a further tax charge arising.  This is significantly more generous than the current regime for non-doms in their first four years of residence.

However, the method of claim as proposed in the draft Finance Bill appears onerous; taxpayers are to report their worldwide income and gains on their tax return and make a claim to reduce their net income and/or gains by the amounts determined to be qualifying foreign income and gains. This will add to the reporting requirement and cost of completing a tax return. It is hoped that by providing all this extra information HMRC can at least reduce the number of ‘nudge’ letters regarding overseas income. Claims are made on a source-by-source basis but any claim means that the income tax personal allowance and capital gains tax annual exemption are not available for that year.

For income purposes, no transitional arrangements are provided in the draft legislation for those who will have already been UK tax resident for four or more tax years before 6 April 2025. Those who are yet to complete four tax years of residence will be subject to the FIG regime for the remainder of that period from 6 April 2025, with pre 6 April 2025 income and gains remaining subject to the remittance rules, subject to the TRF below.

Other FIG issues

• A business loss made wholly outside the UK in a year a FIG claim is made will not be relieved in the UK in that or any other tax year.
• A FIG claim removes the personal allowance for income tax and/or the annual exempt amount for capital gains.
• The FIG claim is ignored for the purposes of determining adjusted net income and therefore allowable pension contributions, meaning that FIG’s will still be counted towards this test.
• Certain foreign income cannot be qualifying, including income directly or indirectly arising from performance of entertainment or sport, whether performed in the UK or not.
• “Property rich company” disposals are expressly not qualifying gains so remain chargeable.
• Taxpayers lose the ability to use foreign capital losses arising in years when a FIG claim is made.

Overseas workday relief (OWR)

Overseas workday relief (rebranded in the draft legislation as a “foreign employment election”) is extended to four years but will be capped to the lesser of 30% of the employee’s total employment income or £300,000 per year. The removal of the remittance basis means it will no longer be necessary to keep the foreign part of the employment income offshore to benefit.

There will be transitional rules specific to OWR such that individuals who have come to the UK expecting to use OWR for the first three years, but which were not previously resident outside of the UK for the requisite 10 year period, can in fact still utilise OWR. 

Temporary Repatriation Facility (TRF)

Further details on the TRF have been provided in the draft legislation, allowing taxpayers who have been subject to the remittance basis for at least one year the ability to bring previously untaxed income and gains to the UK at a reduced tax rate.

Taxpayers will be able to “designate” funds in an account and pay tax on them at 12% (for tax years 2025/26 and 2026/27) or 15% (2027/28). This gives taxpayers and their advisers until 31 January 2028 to identify funds to be designated and charged at the 12% rate.

If a remittance is made then the remitted funds can only be designated for that tax year, but designated funds offshore can be remitted in the future without incurring a further charge, the TRF charge being paid for the year of designation.

Flexibility in the identification rules is also provided by the draft legislation, allowing designated funds to be remitted in priority to other income and gains. Further, designation can be made even when the full breakdown of the funds in an account is not determined, possibly representing a substantial tax saving. Where foreign tax has been paid, the benefit may be small as no foreign tax credits will be available.

Capital Gain Tax Rebasing

For capital gains tax purposes, previous remittance basis users will be able to rebase personally held foreign assets held on 5 April 2017 to their value at that date, providing they are not deemed UK domiciled at 5 April 2025. Quite why 2017 has been used as the rebasing date is not understood, but perhaps provides some relief to those moving to the new regime.

The previous rebasing introduced in 2017 will still be effective for those who were eligible for this, and 2008 trust rebasing remains available.

Non-Doms - IHT for Individuals

As already anticipated, we are now to enter a brave new world for IHT purposes in which domicile will cease to be the key factor in determining the charge to IHT.

The new rules will mean that for individuals, the test for whether non-UK assets are in the scope for IHT will be whether an individual has been UK resident for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (e.g. death) occurs.

The initial fear was that this will create an extreme cliff edge, if it meant that once an individual has been here for 11 years, they are then in the UK IHT net for the next 10 years.  However, there is a slight softening here in that there will be a tapering position for individuals that have been here for between 10 and 19 years, meaning that:

• For those who are resident between 10 and 13 years, they will remain in scope for 3 tax years.
• This will then increase by one tax year for each additional year of residence. So, if a person was resident for 15 out of 20 tax years on leaving, they would remain in scope for 5 years; if resident for 17 out of 20 tax years on leaving, they would remain in scope for 7 tax years.

The test is reset once you have been non-resident for 10 years. For those who have become deemed domiciled under the current rules, leave the UK and become non-resident from 6 April 2025 or before, they will be treated as non-domiciled after four years of non-residence.

For an individual 20 years old or younger, the test will be whether they have been UK resident for at least 50% of the tax years since their birth.

As ever, there will be winners and losers here.  Historically, many Brits have left the UK and then worried as to whether they’ve cut sufficient ties with the UK to lose their UK domicile and replace it with a foreign domicile of choice.  Now all they will need to do is to be non-resident for 10 years, and then remain non-resident.

Lifetime gifts before the new rules will remain broadly unaffected.  IHT on an individual’s estate when they die is calculated taking into account gifts in the 7 preceding years. A lifetime transfer of excluded property remains out of scope for IHT, regardless of whether the individual becomes long-term resident by the time of their death (at which point their remaining non-UK assets are no longer excluded property).   Similarly, a lifetime transfer which did not comprise excluded property at the time it was made will be chargeable at death rates if the transferor dies within 7 years, regardless of whether the individual is long-term resident or has ceased to be long-term resident by the time of their death.

The ability to elect for deemed domicile for IHT purposes will also be updated from 6 April 2025, such that the spouse or civil partner of a long-term resident who is not themselves long-term resident can elect to be treated as long term resident. The purpose of this election is so that there is no charge to IHT on transfers to a spouse who is not long-term resident and the election will last until 10 consecutive tax years of non-residence has elapsed.

The FOTRA gilts rule will remain.

Whilst domicile will fade into the background, it could still be an important concept for succession planning and the application of double tax treaties.

Non-Doms and Offshore Trusts

Settlors and beneficiaries of non-UK trusts 

Those with an interest in a non-UK trust (and the trustees of non-UK trusts) will already be aware of the UK tax complexity these structures can create because of the anti-avoidance rules. Removing the concept of domicile means that the position of the settlor and beneficiaries will need revisiting.

The default position for a UK resident settlor who is not excluded from a trust is that all trust income and gains would be taxed on the settlor each year from 6 April 2025. This brings the position to align with the treatment of UK domiciled settlors prior to the rule change. The settlor can claim the FIG exemption in their first four years in the UK, but thereafter would be taxed unless they are excluded from benefit. In order to prevent the settlor being charged to tax on trust income as it arises, the settlor and their spouse would need to be excluded from benefitting from the trust. In order to prevent trust gains from being charged on the settlor, they would need to exclude a much wider class of beneficiaries, including adult children and grandchildren and can mean that a settlor charge is all but unavoidable for most family trusts. One option here could be to bring the trust onshore so that the trust is subject to capital gains tax in its own right and there is no attribution of gains to the settlor – at least then the party with the gain is the one that will pay the capital gains tax.

Beneficiaries receiving distributions from an offshore trust will, (subject to possible planning mentioned below), be taxed on the income and gains in the trust pools in the normal way. If that beneficiary is able to claim the FIG exemption because they are within their first four years in the UK, such a claim would mean that the trust distribution is not charged to tax on the beneficiary, but it does not reduce the income and gains pools of the trust.

There may be some planning available for trusts with UK resident beneficiaries where distributions are made in 2025/26 to 2027/28 (that is, within the TRF years), in order to benefit from lower tax rates.

The key here will be to review the income and gains pools of trusts and consider the position of both  beneficiaries and settlor(s) to determine whether there is an opportunity to benefit from lower rates, or whether changes such as excluding the settlor / onshoring the trust could be the right approach.

Excluded Property Trusts and Inheritance Tax (IHT)

 The IHT treatment of trusts has been subject to much commentary over recent months.  Whereas the original Conservative proposals were that any trust settled on or before 5 April 2025 would be grandfathered for IHT purposes, the Labour document published earlier this year stated that there would be no grandfathering.  This was then followed by rumours that these proposals would be watered down.  Today’s announcement is rather perplexing, with grandfathering in some cases but not others.

Current rules

 Currently, non-UK assets comprised in a settlement are excluded property (and exempt from IHT) if the settlor was non-domiciled at the time the assets became comprised in the settlement.

There are, broadly, two inheritance tax regimes for trusts:

1. Qualifying interest in possession trusts (QIIPs)

These are trusts where a beneficiary has a right to the income of the trust as it arises and, broadly, either that interest arose before 22 March 2006 or on the death of the settlor. There are other, less common, instances where a trust might be a QIIP.  These trusts are assessed to IHT on the death of the income beneficiary (or if the income beneficiary gives up their interest).

2. Relevant property trusts

These are discretionary trusts created before 22 March 2006 and any trust created after that date, unless there is a QIIP as outlined above.  These trusts are subject to IHT at a maximum rate of 6% on each 10 year anniversary of the trust (the 10 year charge), with a prorated tax charge on assets leaving the trusts between 10 year anniversaries.

New rules – relevant property trusts – changes from 6 April 2025

Broadly speaking, from 6 April 2025 the excluded property status of non-UK settled assets will cease to be fixed at the time the assets are added to the settlement. Instead, assets comprised in a settlement will only be excluded property (and so not subject to IHT charges) at times when the settlor is not long-term resident. When a settlor is long-term resident, any assets they have settled (even when not long-term resident) will be subject to IHT.

Non-UK assets will cease to be excluded property when the settlor becomes a long term resident.  From that point, the trust will become liable to 10 year charges and exit charges.  Relief will be given if the settlor was not long term resident for the entire 10 year period.

It follows that just as trusts established by non-doms who become long term residents will become liable to IHT, the trusts of long term residents who leave the UK will cease to be liable to IHT when they cease to be long term residents. However, on cessation, the trustees will become liable to an exit charge at that time (which would not happen under existing legislation).

Special rules will apply to determine the excluded property trust status of a trust where the settlor has died. Where the settlor of a trust has died before 6 April 2025, non-UK assets will be excluded property based on the old test, namely the settlor’s domicile at the time the property became comprised in the settlement.

Where the settlor of a trust dies on or after 6 April 2025, the excluded property status of the trust will depend on the settlor’s long-term residence status at their death; if they were not long-term resident when they died then non-UK settled assets will be excluded property and if they were long-term resident at death then all UK and non-UK settled assets will be in scope for IHT for the duration of the trust.

QIIPs

Currently, although charged to IHT on the death of the income beneficiary, the excluded property status of assets in a QIIP read back to the domicile status of the settlor when the assets became comprised in the settlement.  Curiously, under the new rules QIIPs will only remain an excluded property trust so long as both the settlor and the income beneficiary remain not long-term resident.

However, there is a welcome element of grandfathering for QIIPs.  Provided the QIIP is in existence on 30 October 2024, the trust will remain exempt from IHT on the death of the existing income beneficiary to the extent of the non-UK situs assets held in the trust as at that date which continue to be non-UK situs for the continuous period until the death of the income beneficiary.  It is not yet clear why existing interest in possession trusts have been afforded this preferential IHT treatment.

The gift with reservation of benefit provisions

If the settlor is a beneficiary of the trust on the settlor’s death the trust assets are be deemed to be comprised in the settlor’s estate for IHT purposes (under the reservation of benefit rules). Similarly, were the settlor to be excluded from benefitting from the Trust, thereby bringing the reservation of benefit to an end, that termination would trigger a potentially exempt transfer which would become liable to IHT if the settlor died within seven years.

Similarly to the transitional provisions for QIIPs there is further grandfathering for non-UK assets comprised in an excluded property trust before 30 October 2024 which continue to be non-UK situs for the continuous period until the death of the settlor or their exclusion from benefitting from the trust.  These assets will not become liable to the gift with reservation of benefit provisions (although the property would be subject to relevant property trust IHT charges will apply from 6 April 2025).

Where to from here?

These changes will affect settlors and their heirs, as well as trustees and the beneficiaries of trusts.

As noted above, some settlors may wish to consider whether to exclude themself as a beneficiary of the trust for income tax and capital gains tax purposes.  The benefits of the grandfathering provisions is that they do not need to rush to do this 6 April 2025 in order to avoid the gift with reservation of benefit (which had been a concern before today’s Budget).

Trustees will want to be sure that they understand how the new rules apply to their trusts bearing in mind that they are liable for reporting and settling the IHT liabilities.

As ever, every trust will be in a unique position, and therefore we recommend that you speak to your client relationship adviser in the first instance.

Employment Taxes

Following the much publicised pledge included in the Labour Party manifesto to not increase taxes for ‘working people’, and the ensuing debates about how this should be defined, the Chancellor confirmed today that there would indeed be no increases to the rate of income tax or national insurance paid by employees or the self-employed on their earnings.

It was also announced that the National Living Wage (NLW), applicable to workers over the age of 22, will increase to £12.21 per hour from 6 April 2025 – a 6.7% increase. Younger workers will also see an increase, with the aim to have a uniform National Living Wage for all adults in time, although no date has been confirmed for the single NLW.

Employer’s National Insurance

It was however no surprise following the leaks over the past week that Rachel Reeves did announce an increase in Employer’s National Insurance (NI).

From 6 April 2025, the rate that Employer’s pay National Insurance on their employees’ wages and salaries will increase to 15% from 13.8%, and the threshold where Employer National Insurance becomes payable will be reducing from £9,100 per year to £5,000 per employee.

There were concerns before the full announcements were made that an increase in Employer National Insurance would in fact impact ‘working people’ – for example a self-employed individual with a small workforce would face an increased Employer National Insurance cost, which would reduce their trading profits.

Thankfully the Government has sought to combat this impact for smaller employers by increasing the Employment Allowance from £5,000 to £10,500 per annum from 6 April 2025.  The Employment Allowance will provide full relief against the first £10,100 of Employer National Insurance costs each year. Previously the allowance was not available for employers (and connected employers) who had an NI bill in excess of £100,000 in the prior year, but this restriction will also be scrapped from 6 April 2025.

By increasing the Employment Allowance, smaller employers will have some protection from the increased NI rate.  For example, an Employer with four full-time employees paid at the new National Living Wage will actually see a reduction in Employer’s NI of £2,000 per year.

Benefits In Kind - Company Vehicles

Pick-up Trucks

The previous government had previously suggested that the current status of double-cab pick-ups with a gross pay load of at least a tonne would be amended so that such vehicles would be considered as cars rather than good vehicles, however following significant backlash they quickly reversed this decision and agreed to maintain the status quo.  Goods vehicles (such a vans) qualify for a much lower company vehicle tax charge for employees and employers, and qualify for more generous capital allowance deductions for trading businesses.

The Government have today announced that they will in fact be changing the tax status of such vehicles, and double-cab pick-ups will be considered as ‘cars’ for Benefit in Kind and Capital Allowances purpose.  It is not yet clear when this measure will take effect, although transitional arrangements are expected to apply. 

Company car tax rates 2028 to 2030

The Chancellor also announced new percentage rates for the purposes of calculating the Benefit in Kind charge on company cars from 2028, with the aim of gradually increasing the rates for electric cars but maintaining a significant difference between electric and non-electric vehicles.  The percentages for zero emission and electric vehicles will increase by 2% per year in 2028/29 and 2029/30. This will take the rate from 5% in 2027/28 to 7% in 2028/29 and 9% for 2029/30.

Reporting of Employment Benefits in Kind

The government has announced that it will mandate the reporting of most Benefits in Kind (BIKs) in real time from April 2026. This means that most BIKs, will need to be reported to HMRC through the company’s regular payroll submissions.

For employees, this should simplify their tax position as they should pay the correct amount of tax within the tax year, rather than the current system where employees often pay income tax on their employment benefits a year in arrears once forms P11d have been submitted by their employer.

In year reporting

Employers will be required to report the cash equivalent evenly throughout the year via the employees’ payslips.   If a change to the cash equivalent occurs in year, the employer must make an adjustment in the remaining pay periods. An end-of-year reconciliation process is to be introduced to amend reported benefit values if needed, but we await further details on this.

Excluded benefits

Employment related loans and accommodation are to be mandated in the same way at a later date, however employers will be able to voluntarily payroll these BIKs from April 2026. The P11D and P11D(b) process will still be available for those that do not want to payroll these benefits in the short term but they will not be available to report any other benefits.

Penalties for non-compliance

The penalty position for failures to comply will be monitored from April 2026 to April 2027 as it is recognised that there will be a period of adjustment in the first year.

Stamp Duty Land Tax (SDLT) 

Higher rates of SDLT for Purchases of Additional Residential Property by Individuals and Companies

For transactions with an effective date (completion) between 31 October 2024 and 31 March 2025 the rates are increased as follows:

• Consideration up to £250,000 – 5%
• Consideration from £250,001 - £925,000 – 10%
• Consideration from £925,001 - £1,500,000 – 15%
• Consideration above £1,500,000 – 17%

Where contracts are exchanged prior to 31 October but complete or are substantially performed on or after that date, transitional rules may apply.

Single Rate of SDLT Payable by Companies and Non-Natural Persons on Purchases of Residential Properties for More Than £500,000 

For transactions with an effective date (completion) on or after 31 October 2024, the single SDLT rate of charge for acquisitions of residential properties above £500,000 by companies and non-natural persons will increase from 15% to 17%.

VAT and Private School Fees

As widely expected, the government has implemented VAT on services provided by private schools by removing the previous exemption applying to children of compulsory school age.   This will result in private school fees for education and vocational training being subject to VAT at the standard rate.  The changes also bring into charge the provision of board and lodging as this is deemed to be closely related to the main supply.  Nursery classes remain unaffected (assuming they are only made up of children below the compulsory school age) and schools offering both settings will therefore become partially exempt as a result.

Of course, schools will need to determine which supplies are closely related and initially this could result in similar schools offering services with different rates of VAT when compared to other schools. At least until the next round of court cases are heard to clarify matters further.

The measures include a prepayment clause so that any payments made after 29 July 2024 that relate to the provision of services made after 1 January 2025 will be subject to VAT at the standard rate.

The private schools affected by this measure may still be able to reclaim VAT on capital expenditure made after 1 January 2015 and in some cases, this could mean the first VAT return submitted in 2025 could be a substantial reclaim.  Care will need to be taken to ensure the maximum amounts are reclaimed before time limits prevent the schools from making a claim.

It should be noted that there are numerous challenges in relation to this measure making their way through the courts, but it is unlikely this will have any effect on the proposals given the short timeframe between now and implementation on 1 January 2025.

In an added but already expected move the government also confirmed its commitment to remove the eligibility of private schools in England from the business rates charitable rates relief, further adding costs to the sector.

Taxation of Carried Interest

New Capital Gains Tax Rate

Effective from 6 April 2025, a single capital gains tax rate of 32% will apply to carried interest receipts.  This is an interim measure before carried interest receipts are to be incorporated into the income tax regime from 6 April 2026.

Introduction of Income Tax Regime

Earlier this year, the government undertook a call for evidence to explore existing carried interest structures with a view to reforming the taxation of carried interest receipts, which are currently predominantly subject to capital gains tax.

In response to the submissions, the Budget announces a new taxing regime for carried interest which will sit within the income tax framework, whereby receipts will be treated as trading profits subject to income tax and class 4 National Insurance contributions.

To take into account the complexities and unique characteristics of carried interest entitlements, the qualifying carried interest distributions to be taxed as trading income will be subject to a reducing adjustment, currently announced at 72.5%.

The new rules will sit alongside the existing rules for income based carried interest.  The new regime is likely to include special computational provisions which consider (i) a minimum co-investment requirement and (ii) a minimum period between receiving carried interest and receipts of distributions. A consultation will run for further consideration and industry input on these points.  We expect further details on this following the consultation.

The new provisions will apply only in respect of carried interest returns.  In respect of returns received by other investors, including co-investment participants who also receive a carried interest, the existing rules will continue to apply.

Employee Benefit Trusts (EBTs) and Employee Ownership Trusts (EOTs)

EBTs have been a useful way of rewarding employees, but have been subject to wide reaching anti-avoidance measures following misuse by some. Separately, EOTs have provided a way for employees to own companies, giving generous capital gains tax relief for those disposing of a majority the shares in a company to a trust for the benefit of employees.

Changes to these two types of employee trusts come in from Budget day (30 October 2024) and are largely designed to focus the relief to the original parliamentary intent.

Employee Ownership Trusts

Changes announced for EOTs should not materially impact on disposals envisaged, but will require review by the relevant teams looking at the transactions.

Previously, there was no legislative footing to rely on for the tax treatment when the company makes distributions to an EOT.  Such distributions are often required to provide the EOT with the cash to repay the former business owners for the sales price of the shares in the company that the EOT acquired.  There has been a concern that such distributions would in theory be taxed on the EOT. This has now been legislated for to introduce a specific relief as long as the EOT relief requirements are met. This gives certainty for those who have sold to an EOT, or who are considering it in the future.

The other changes mean that:

• The acquiring trustees have to be UK tax resident as a whole at the time of the acquisition.
• The former business owners, if trustees of the EOT trust, will need to be outnumbered by non-connected trustees – this is to ensure the business owners do not retain control of the company post-sale.
• When making a claim for capital gains tax relief, the seller must now report the sale price and the number of employees to HMRC as part of the claim.
• There are requirements for the trustees to ensure market value is paid for the acquisition.

Where conditions are not met after the disposal to an EOT, it is possible for HMRC to withdraw capital gains tax relief granted initially. This clawback period is now four years.

Employee Benefit Trusts

Two smaller changes have been made to the availability of IHT relief. These are effective from Budget Day and are that:

• IHT relief is only available if less than 25% of employees who can benefit from the EBT are connected to the company owner;
• IHT relief is available only if the owner disposing of the shares to an EBT has held them for at least two years (with rules allowing addition of ownership periods for share reorganisations)

Cryptoasset Reporting

While not directly tax related, we note that as part of the expansion of the Common Reporting Standard (CRS), cryptoasset service providers will be required to undertake certain due diligence requirements, and individual users will need to provide valid self-certification. There will be penalties for non-compliance.

This will no doubt improve the quality of the information HMRC receives in relation to cryptoasset reporting, and their ability to follow up with taxpayers who may not have correctly reported income and gains from this asset class.

Simplifying the Taxation of Offshore Interest

The UK has various information exchange agreements with other jurisdictions in respect of overseas assets and overseas income received by UK residents.

The information provided under these agreements to HMRC and information provided to taxpayers is often on a calendar year basis.  This creates difficulties for taxpayers when completing their self-assessment tax returns, and for HMRC reconciling the information received.  This is expected to have a larger impact in future with the announced reform to the non-dom tax regime as more UK taxpayers will be required to report non-UK investment income to HMRC.

The government has announced a consultation on how this can be simplified including whether offshore interest should be reported on a calendar year basis. This would be a welcome change to reduce the administrative burden on taxpayers.

Charities Tax Compliance

There is no doubt about the importance of valuable tax reliefs for the charity sector and any proposed changes should not affect the compliant majority. Following the consultation period, the government has amended its proposal as follows and intends to publish draft legislation in 2025.

Investments

The government are looking to implement measures to stop donors obtaining a financial benefit deriving from how the charity invests the donation. This can currently be exploited by the charity investing into a company owned by the donor or purchasing property for the benefit of the trustees.

The government seeks to lower the bar for challenging these transactions and introduce legislation to ensure that all investments are for the benefit of the charitable purpose.

Anyone who feels they may receive a financial advantage in return for a donation should seek further advice regarding The Tainted Charity Donations rules.

Sanctioning Non-Compliance

HMRC intend to withhold payments of Gift Aid to non-compliant charities although opportunity will be given to these charities to rectify the position before doing so. The government intends to work alongside the sector and charities to educate and ensure compliance.

Corporate Taxes

The government have acknowledged that businesses need some stability following several years of significant change for corporate taxes.

They committed today that they will cap the main headline rate of corporation tax to 25% for the duration of their parliament, and that the Small Profits Rate and marginal relief will continue at their current rates and thresholds.

As a reminder, the Small Profits Rate of 19% applies to companies with profits under £50,000, whilst marginal relief is available for profits between £50,000 and £250,000. Companies with profits of more than £250,000 are subject to the main rate of 25%.

Capital Allowances

The Chancellor also confirmed that they intend to keep the full expensing regime for companies, which provides 100% relief in the year of purchase to qualifying new ‘main rate’ capital expenditure and 50% relief to ‘special rate’ expenditure such as integral fixtures and fittings. The £1 million Annual Investment Allowance for qualifying expenditure will also continue and applies to both companies and unincorporated businesses.

The Chancellor has confirmed the extension of first-year allowances (FYA) for zero-emission cars and electric vehicle charging points. The FYA will continue to be at a rate of 100%. The extension is to 31 March 2026 for Corporation Tax purposes and 5 April 2026 for Income Tax purposes.

Research and Development (R&D) 

The Government has also confirmed that they plan to maintain the R&D rates under the newly merged R&D expenditure Credit scheme and Enhanced Support for R&D Intensive SMEs, which took effect from 1 April 2024.

Fraud and error

The Government are continuing the drive to reduce fraud and error in R&D claims, and the existing measures implemented to combat fraud and error will continue, including:

• PAYE-related cap on size of claim for SMEs;
• Requirements to notify HMRC of the named company officer with responsibility for claims, and of the identity of any advisers used when compiling claims;
• Requirement to give HMRC advance notification of claims;
• Requirements to claim digitally and provide additional information; and
• Removing the use of nominations for R&D tax credit payments/preventing any new assignments of R&D tax credits.

Loans to Close Company Participators

There are currently rules in place which apply a temporary corporate tax charge of 33.75% on loans made by close companies to their participators, with the tax eligible to be repaid to the company in a later accounting period when the loan is repaid.  Although ‘bed and breakfasting’ rules already apply to counteract the repayment and redrawing of loans to avoid the tax charge, there was an announcement today to combat perceived tax avoidance via the repayment of loans via group companies.

International Corporate Tax Issues

The government will hold consultations on possible reforms to the UK’s transfer pricing, Permanent Establishment and Diverted Profit Tax rules, with the potential to remove UK-to-UK transfer pricing to reduce the UK compliance burden.

There will also be further consultations on lowering the exemption for transfer pricing for medium-sized businesses, although they have confirmed that an exemption for small businesses will be retained.

Multinational Top-Up Tax and Domestic Top-Up Tax

As previously reported, in 2021 the UK and other members of the Organisation for Economic Co-operation and Development (OECD)/G20 reached an agreement to a two-pillar solution to reform the international corporate tax framework. Pillar 2 of the agreement ensures that large corporate groups are subject to a global minimum rate of corporate tax of 15% to reduce the incentives for base erosion and profit-shifting.

As part of the UK adoption of the OECD Pillar Two rules, the government introduced two new taxes – Multinational Top-Up Tax (MTT) and Domestic Top-Up Tax (DTT). Both taxes are applicable to accounting periods beginning on or after 31 December 2023. Please refer to our Spring Budget update on 15 March 2023 for a more detailed look at the rules - https://www.charter-tax.com/spring-budget-15-march-2023/.

As part of the Autumn statement 2024, the government confirmed they will provide technical amendments to the MTT & DTT legislation in the Finance Bill 2024-25 to help facilitate the effective implementation of the Pillar Two rules as they continue to evolve and following stakeholder consultation. The amendments are designed to help navigate through the complex MTT and DTT rules.

Undertaxed Profit Rules

The government introduced a further ‘backstop’ tax to capture situations not already covered by MTT and DTT, known as the undertaxed profit rule. The undertaxed profit rule (UTPR) is applicable to accounting periods beginning on or after 31 December 2024.

The UTPR is one of two mechanisms within the MTT regime, with the primary mechanism known as the Income Inclusion Rule (IIR). The UTPR works as a backstop to ensure that any amounts of multinational top-up tax that are not collected under an IIR will still be collected.

The government have now confirmed they will legislate for the UTPR in the Finance Bill 2024-25. Included within the update will be transitional ‘Country-by-Country Reporting’ safe harbour anti-arbitrage rules as agreed by the OECD, which will prevent avoidance transactions that are designed to allow groups to qualify for the transitional country-by-country reporting safe harbour and therefore not have to prepare the full top-up tax calculations.

Capital Gains on Liquidation of an LLP

A rather niche tax planning “opportunity”, which we have heard being promoted in certain circles, is being targeted by draft legislation published today.

Under current rules, no chargeable gains accrue when a member contributes an asset to a Limited Liability Partnership. On appointment of a liquidator, an LLP is then taxed as it had always been a company, thus creating a loophole for a tax-free uplift of the assets from the original purchase price to the market value when the assets were transferred to the LLP.

The new legislation closes this loophole, such that there is a deemed disposal by the member where an LLP is liquidated on or after 30 October 2024 and assets a member has contributed are disposed of to that member or a company or person connected to them.  The amount of the gain which accrues is equal to the amount which would have accrued at the time the asset was contributed to the LLP – i.e. the latent gain on the asset at the time it was contributed to the LLP.

Tax administration and other measures

Strengthening the Regulatory Framework and Improving Registration

As mentioned in our Spring 2024 budget update, the government have conducted a consultation to explore ways to improve regulatory frameworks and ensure that tax practitioners are held to a higher professional level to help mitigate substandard advice and services to clients.

Following this consultation it has been announced that from April 2026 tax practitioners must register with HMRC to interact with them on behalf of clients. Tax practitioners wishing to submit an income tax repayment claim on behalf of a client will be required to obtain an Advanced Electronic Signature from their client to prove they have been authorised to make the claim.

There will be further consultations on options for stronger sanctions against tax practitioners who enable their clients to pay the wrong amount of tax either through lack of competence, lack of due care or malicious intent. As mentioned in our Spring budget update, Charter Tax are an ICAEW regulated firm, and as such are already held to a high standard through our compliance with the Professional Conduct in Relation to Taxation (PCRT) Rules.

The Tax Administration Framework Review - new ways to tackle non-compliance

We welcome the announcement that there will be a consultation to explore whether there can be improvements made towards HMRC’s current powers to correct mistakes by large numbers of taxpayers.

This is underpinned by the government’s call for evidence for ‘The Tax Administration Framework Review: enquiry and assessment powers, penalties, safeguards’ earlier in the year.

HMRC Interest Rates

Late Payment Interest

Late payment interest on unpaid tax liabilities will increase by 1.5% from 6 April 2025 to the Bank of England base rate plus 4%. With the current base rate of 5%, this would result in late payment interest of 9%.

Official Rate of Interest

The Official Rate of Interest (ORI) is the rate which is applied when calculating the taxable benefit in respect of interest-free or low interest loans. Typically these loans are employee loan from an employer or a loan from an offshore trust, and broadly the ORI is multiplied by the value of the loan to calculate the taxable benefit.

The official rate of interest has not had an in-year increase in nearly 30 years however the government have paved the way for the rate to be reviewed on a quarterly basis from 6 April 2025. It is not clear what the rate will be at this date but the current rate is set at 2.25%.

We are here to help

As ever, we are here to help, please get in touch with your usual Charter Tax contact or email us at advice@charter-tax.com.