Autumn Budget 2024: capital taxes

Disposals where contracts are exchanged on or after Budget Day will find the liability to CGT increased.

Rates of CGT

With immediate effect (from 30 October 2024), the lower rate of CGT is increased from 10% to 18% for non-residential capital gains falling within an individual’s basic rate band.

For higher rate tax payers, the rates will increase from 20% to 24% with immediate effect.

For trustees and personal -representatives, the rate will increase from 20% to 24% with immediate effect.

This brings the rates of CGT on non-residential gains in line with those for residential property, which will remain unchanged.

Annual exemption

The amount of the annual exemption remains unchanged at £3,000 per individual and £1,500 for trustees.

Business Asset Disposal Relief and Reinvestment Relief

Whilst the above rate changes will take effect immediately for most assets, there is a small reprieve for gains on assets qualifying for Business Asset Disposal Relief (BADR) or Reinvestment Relief (RR). 

These disposals currently benefit from the lower rate of CGT at 10% on the first £1,000,000 of gains for those qualifying for BADR and £10,000,000 of gains for those qualifying for RR. 

The limit of £10,000,000 for RR is being reduced immediately to £1,000,000 in line with BADR.

The 10% rate of CGT will continue on the first £1,000,000 of gains qualifying for BADR or RR until April 2025. There will then be a phased increase in the rates affecting these gains with the first rise taking place on 6 April 2025 to 14% and then on 6 April 2026 to 18%.

As an example, a business owner selling shares in their personal company which qualify for BADR with a taxable capital gain estimated as £800,000, will have the following liabilities:

Disposal before 5 April 2025 CGT = £800,000 x 10% = £80,000

Disposal before 5 April 2026 CGT = £800,000 x 14% = £112,000

Disposal after 6 April 2026 CGT = £800,000 x 18% = £144,000 

An increase of £64,000 over current rates if the disposal takes place after 6 April 2026.

The most significant reforms were announced for IHT but there will be a short period before these come into force. These will not come into effect until April 2026 for Agricultural Property Relief (APR) and Business Property Relief (BPR) changes, or April 2027 for undrawn pension pots and death benefits. The finer details on these and how they will work in practice will be much awaited. 

Nil Rate Band and Residential Nil Rate Band

The freeze on the IHT thresholds of £325,000 Nil Rate Band, £175,000 Residential Nil Rate Band and £2million threshold for taper of the Residential Nil Rate Band has been extended to April 2030. In a time when property continues to rise in value, this will no doubt bring more estates into the realms of paying IHT.

In addition, the budget proposal to bring undrawn pension funds and death benefits into the scope of IHT will affect a huge number of individuals and may tip the balance as to whether IHT is payable.

Undrawn pension funds and death benefits

Following the changes in the pension regulations in 2016, when you were given flexibility over how you take your pension fund and were no longer required to buy an annuity, the undrawn funds of a defined contribution scheme and death benefits of a defined benefit scheme could pass to a designated beneficiary without forming part of your estate. 

For many, this has been a useful tool and additional way to pass wealth to the next generation without incurring IHT. The contributions possibly were receiving income tax relief at the higher rates when being paid into the scheme and then, where the fund is surplus to income requirements, the whole undrawn fund could pass tax free to a beneficiary. This was extremely attractive to wealthy individuals.

From April 2027, it is proposed that any undrawn pension funds and death benefits from discretionary schemes of both defined contribution and defined benefit schemes will now form part of the estate for IHT purposes. 

Any tax due will be payable by the pension scheme administrators (PSA) within six months of the date of death. It will still be the personal representatives’ (PR) responsibility to calculate the IHT due for the total estate and advise the PSA of the tax due on the pension fund element including any entitlement to a proportion of the Nil Rate Band.

The proposal is hoped to encourage the use of the pension funds in an individual’s lifetime, as intended, rather than being used as a savings tool and avoiding IHT.

The impact of these changes will affect many. For smaller estates this could result in an IHT charge where none was due previously.

More significantly, this will impact on higher estates, with in some cases, the loss of the Residential Nil Rate Band if the pension funds takes the total estate over the £2 million threshold as well as the additional tax charge on the pension funds themselves.

For example, take an estate for a surviving spouse, where everything was transferred to them on the first death, made up as follows:

Family home passing to descendants - £850,000

Rental property - £650,000

Other savings and investments - £500,000

Undrawn pension fund/death benefits - £800,000

The current IHT position is that the estate will qualify for two Residential Nil Rate Bands resulting in a liability of £400,000.

From April 2027, the liability will increase to £860,000 being an additional £140,000 due on the loss of the Residential Nil Rate Bands and £320,000 IHT on the pension fund.

It had been mooted that Agricultural Property Relief (APR) and Business Property Relief (BPR) may be abolished completely but the proposals have not gone that far and have just reduced the amount of relief available. In her statement, the Chancellor suggested these changes will only affect a minority of estates, estimated as around 2,000 estates, but it could be argued that this estimate is on the low side.

The first change relates to environmentally managed land. Currently for farmland to qualify for APR it has to be used for agricultural purposes. Many farmers are removing land from agricultural purposes to accommodate environmental schemes of land management. 

With effect from April 2025, the legislation will be amended so that the environmental value of land managed under an environmental land management agreement will be eligible for APR. This will cover agreement with or on behalf of the UK government, devolved administrations public bodies, local authorities or approved responsible bodies.

This change will be much welcomed and hopefully encourage more environmental land management.

Shares not on a recognised stock exchange, such as those listed on AIM, currently benefit from 100% BPR, and have become a very favourable investment tool. These shares will now only attract BPR at 50% from 6 April 2026.

In addition to the changes on these shares, APR and BPR at the rate of 100% relief, will be restricted to the first £1 million of combined APR and BPR assets with any amount above this value being subject to relief at 50%. 

This allowance will cover the following transfers:

• property in the estate at death
• lifetime transfers to individuals in the seven years before death (including failed potentially exempt transfers)
• chargeable lifetime transfers where there is an immediate lifetime charge, so for example, when property is transferred into a trust

Assets only qualifying for 50% relief will not be taken into account for the allowance and the rate of relief will not be affected by these changes, i.e. land used by a partnership of which a partner holds the asset personally, off-balance sheet.

There will be a combined £1 million allowance for relevant property trusts on the value of qualifying assets to give 100% APR and BPR where applicable. This will apply to each periodic charge, “ten year charge” and for exit charges.

The allowance will be apportioned between trusts where these trusts are created by the same settlor on the same day.

The new rules will apply for lifetime transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026.

For example, an estate comprising of the following:

Agricultural land qualifying for APR with a current agricultural value of £1,600,000

Additional hope value of land but used within the business so covered by BPR £600,000

AIM shares £100,000

Other assets not qualifying for APR/BPR £650,000

Currently the IHT liability could be nil if the estate benefits from the transferred spouse Nil Rate Band.

Under the proposed changes, from April 2026 the liability on the same estate will become £260,000.

This additional IHT liability will need to be met and may result in assets having to be disposed of to settle the liability. 

If individuals have not reviewed their IHT position for some time, it seems a very sensible time to do this, and make arrangements to cover any potential additional liabilities and ensure the disposal of agricultural land and business assets are not required to satisfy the IHT liability for the estate.