Key Takeaways from the Autumn Budget 2024

Rachel Reeves, the first female Chancellor of the Exchequer in the role’s 800-year history, delivered Labour’s first budget in 14 years on the 30th October. We have set out below a brief summary of some of the tax measures that are likely to be of relevance.

Carried Interest Taxation Reform

From April 2025 to April 2026 the current rules continue to apply but the minimum capital gains tax rate applying to carry will increase to 32%.

From April 2026 more fundamental changes are scheduled to come into force. All carried interest will be taxed as trading income at normal marginal tax rates (so up to 45% plus 2% class 4 National Insurance Contributions (NICs)) but ‘qualifying’ carried interest will be effectively subject to a special lower rate of income tax and class 4 NICs. Only 72.5% of qualifying carried interest amounts will be subject to income tax (with no tax payable on the remainder) which, on current rates, gives a combined income tax and class 4 NICs rate of just over 34% (broadly in line with the French rates but higher than Italian, German and Spanish rates). There will be no grandfathering for existing carry arrangements.

For carry to be viewed as ‘qualifying’ for this new regime it cannot be ‘income based carried interest’ (IBCI) under the existing IBCI rules, which will be extended to cover both employees and non-employees (IBCI was previously not relevant to employees).

In addition, a consultation has been launched on adding further conditions that will need to be met in order for carry to be considered as ‘qualifying’ for the new regime. HMRC describes these further conditions as being ‘either by reference to the amount of capital invested by fund managers into the funds they manage or the period of time between the award of carried interest and its receipt’. It is possible, therefore, that a minimum level of co-invest will be required and/or the manager will need to have held their carry for a minimum time period in order for their carry to qualify for the special, reduced, rate of income tax.

The IBCI regime is already complex and requires the average holding period of fund investments to be computed. The rules are onerous to engage with and there are many instances where they do not deliver the result one might generally expect, particularly for credit funds. As such a consultation on possible changes to these rules is welcome and may (depending on the scope of the changes the Government is willing to contemplate) be helpful. In this respect the Government announcement specially noted that changes in how these rules apply to credit funds were being considered.

The choice to tax carried interest as trading income fundamentally impacts the jurisdictional scope of the regime. UK capital gains tax typically ceases to apply to an executive that has permanently left the UK. However, under these new rules, executives who have worked in the UK and then move abroad will still be subject to UK tax on their carried interest to the extent that it can be attributed to their services that were performed in the UK.

Changes To The Rates of CGT

The lower and higher main rates of capital gains tax in the UK will increase from 10% and 20% to 18% and 24% respectively, for disposals made on or after 30 October 2024. These rates apply to assets other than residential property and carried interest (noting the rates that apply to residential property disposals (18% and 24%) will remain unchanged. Also see “Carried interest taxation reform and IBCI changes” above).

The rate of capital gains tax that applies to Business Asset Disposal Relief and Investors’ Relief will increase from 10% to 14% for disposals made on or after 6 April 2025, and from 14% to 18% for disposals made on or after 6 April 2026.

Special anti-forestalling provisions will apply in respect of contracts entered into before 30 October 2024 that complete after that date for the main rate changes, and for contracts entered into on or after 30 October 2024 for the phased rate changes that applies to Business Asset Disposal Relief and Investors’ Relief. There will also be special provisions in respect of share reorganisations and exchanges where an election is made.

Increase To The Rate of Secondary Class 1 NICs

The rate of employer national insurance contributions (NICs) will increase by 1.2 percentage points from 13.8% to 15%. The per-employee threshold at which employers start to pay national insurance will be reduced from £9,100 p.a. to £5,000 p.a. Both of these changes will apply from 6 April 2025.

To support small businesses with these changes, the Government has also proposed to increase the Employment Allowance from £5,000 to £10,500 and will remove the £100,000 threshold, expanding this to all eligible employers.

Reform To The UK’s Taxation of Non-UK Domiciled Individuals

Significant changes have been announced to the UK taxation of non-UK domiciled individuals (so called "non-doms"). It has been confirmed that from 6 April 2025:

• the current remittance basis of taxation will be abolished for income and gains arising after 6 April 2025 to be replaced by a new residence-based regime;
• the new regime will provide 100% relief on eligible foreign income and gains (FIG) arising to qualifying individuals in the first four years of tax residence (noting such individuals must have been non-UK tax resident for at least 10 consecutive years prior to their arrival in the UK in order to qualify for this relief);
• current resident non-dom remittance basis users who are not entitled to the new 4-year FIG regime will pay tax at the same rate as other UK resident individuals on any newly arising FIG;
• former remittance basis users will continue to pay tax on FIG that arose before 6 April 2025 that they remit to the UK;
• a new Temporary Repatriation Facility (TRF) will also be available for individuals who have previously claimed the remittance basis and have untaxed FIG. Such individuals will be able to make an election to designate amounts derived from previously untaxed and unremitted FIG that arose prior to 6 April 2025 for a period of 3 tax years, from 6 April 2025 with the designated amounts charged to tax at a rate of 12% in tax years 2025 to 2026 and 2026 to 2027, rising to 15% in tax year 2027 to 2028. Any remitted ‘designated amounts’ will not otherwise be charged to UK tax;
• when an individual ceases to qualify for the new regime (i.e. after the initial 4 years of being UK tax resident), such individual will be required to pay UK tax on their worldwide income and gains on an arising basis (as is the case for all other UK residents); 
• the taxation of FIG arising in certain settlor-interested trust structures will also change with likely significant tax consequences for non-doms who previously relied on these structures to keep assets and income outside the UK tax net (although such FIG may qualify for the 4-year FIG regime); and
• for CGT purposes, current and past remittance basis users can rebase their personally held foreign assets to 5 April 2017 where certain conditions are met.

Changes to UK Inheritance Tax (IHT)

IHT: Thresholds
There are two nil-rate bands within IHT. Subject to available reliefs and exemptions, tax is payable to the extent the net value of the estate exceeds these nil-rate bands. The current IHT thresholds were due to be frozen until April 2028, and the Government is extending these threshold freezes for a further two years to April 2030.

As such, the nil-rate band rate will remain at £325,000, the residence nil-rate band will remain at £175,000, such that the overall threshold remains at £500,000 per person when passing on a place of residence (with a potential £1 million combined threshold for spouses leaving their residence to their offspring). Existing rules tapering the residence nil-rate band for estates over £2 million will continue to apply.

IHT: Agricultural Property Relief and Business Property Relief
From 6 April 2025, the existing scope of agricultural property relief (APR) will be extended to include land managed under an environmental agreement with, or on behalf of, the UK Government, devolved Governments, public bodies, local authorities, or relevant approved responsible bodies.

From 6 April 2026, new restrictions will be introduced to the APR and business property relief (BPR). Broadly, 100% rate of relief from IHT will continue for the first £1 million of combined agricultural and business property and it will be 50% thereafter. The Government will also reduce the rate of BPR from IHT available from 100% to 50% in all circumstances for shares “not listed” on the market of a recognised stock exchange (such as AIM listed shares).

IHT: Unspent Pension Funds
From 6 April 2027, most unused pension funds and death benefits will be included within the value of a person’s estate for IHT purposes and pension scheme administrators will become liable for reporting and paying any IHT due on pensions to HMRC. There is a technical consultation on the processes required to implement these changes for UK-registered pension schemes.

IHT: Change to Residence-Based System
From 6 April 2025, the domiciled-based system will be replaced with a new residence-based system.

Broadly, the base 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 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises. This could effectively limit the use of offshore trusts to shelter assets from IHT. As such once an individual comes into scope for IHT they will remain so for 10 years after leaving the UK.

The time an individual remains in scope after leaving the UK will be shortened from 10 years where they have only been resident in the UK for between 10 and 19 years.

The test will reset where a person is non-resident for 10 consecutive years.

SDLT: Increase to ‘Higher Rates’ of SDLT

From 31 October 2024, the Higher Rates for Additional Dwellings (HRAD) surcharge on Stamp Duty Land Tax (SDLT) will increase from 3% to 5%. This surcharge will also be paid by non-UK residents purchasing additional property. Those who exchanged contracts prior to 31 October 2024 are not affected by this rate increase.

The single rate of SDLT that is charged on the purchase of dwellings costing more than £500,000 by corporate bodies will increase from 15% to 17%.

Investors’ Relief: Lifetime Limit Reduction

Investors’ Relief (IR) provides for a lower rate of CGT to be paid on the disposal of ordinary shares in an unlisted trading company where certain criteria are met, subject to a lifetime limit of £10 million of qualifying gains for an individual.

This measure reduces the lifetime limit for IR from £10 million to £1 million for all qualifying disposals made on or after 30 October 2024, matching the lifetime limit for Business Asset Disposal Relief.

VAT on Private School Fees

From 1 January 2025, all education services and vocational training supplied by a private school will be subject to VAT at the standard rate of 20%. Closely related boarding services will also be subject to VAT at 20%.

The intention is that nurseries (both standalone and those attached to a private school) will remain exempt and only fees for children in the first year of primary school upwards will become taxable.

Any fees paid from 29 July 2024 (i.e. the date Labour announced that private school fees would become subject to VAT) for terms starting in January 2025 onwards will be subject to VAT.

Arrangements will be made to minimise the impact of these changes in relation to certain special educational needs and disability (SEND) pupils whose private school places are funded by a Locally Authority, devolved government, or non-departmental public body.

Reducing Tax-Free Overseas Transfers of Tax Relieved UK Pensions

Transfers of UK pensions to Qualifying Recognised Overseas Pension Schemes in the EEA will become subject to the Overseas Transfer Charge rules for transfers from 30 October 2024 with the rules aimed to prevent the removal of large pension funds from the scope of UK tax.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.