Budget October 2024 – As bad as we feared?

By Kathryn Gigg Chartered Accountants, Hunstanton

Speaking the morning after the 2024 Autumn Budget, Rachel Reeves confessed “I had to make big choices. I don’t want to repeat a Budget like this ever again, but it was necessary …” For that at least, we must be grateful. Otherwise, although the Budget avoided some of the areas which were raised in the speculation leading up to the event, it still marks a return to the “Tax and spend” approach.

The main features of the Budget will have been fully described in the wider press, so suffice it to say that despite some very minor giveaways such as a reduction in the duty on draught beer and yet another deferral of fuel duty indexation, the thrust is to raise £40Bn through a variety of measures, almost all of which will hit businesses and investors, along with some manifesto promises such as more tax for those who are non -domiciled or who choose to put their children into private education. The amounts that will be raised by these last two changes is far from certain, since taxpayer behaviour is difficult for the Treasury to model.

Other attacks on capital are more straightforward. Hitherto, the transfer of undrawn pension funds on death has been outside the scope of Inheritance Tax (IHT). This will change from April 2027. It would appear that interspouse transfers will follow the existing IHT exemptions, but ultimately any such pension pot will attract an IHT charge. In some cases, the executors may have to pay income tax on the funds withdrawn to cover the IHT liability, raising the marginal tax rate to 66%. Aside from anything else, this will dramatically increase the number of Estates liable to pay IHT, from 4% to 12% (according to The Times). Given that each Estate is likely to have multiple beneficiaries (who are ultimately those that suffer the tax) that makes quite a few disgruntled taxpayers. Coupled with the pension changes, it was also announced that the existing IHT Nil Rate Band and Main Residence band would be frozen for another two years, by which time they will have been frozen for 19 years!

IHT changes will also affect businesses more directly. Since 1992 most types of business property or shares in a trading company have been fully relieved from an IHT charge as have most types of agricultural property. From April 2026 the 100% relief will be capped at £1m and thereafter restricted to 50% (a rate which will also apply to AIM shares). For example, under the old rules, a business (including property, stock in hand and machinery) worth say, £4m, would have been free of IHT thus ensuring unhampered succession and a continuing business. Under the new rules there would be a tax charge of £600,000. These reliefs, which have recently been described as “loopholes” were in fact specifically directed to avoid the position where a business, or farm, had to be sold to pay IHT and, potentially, employees lost their jobs as a result. From 2026 that will be a much greater risk.

The increase in tax does not solely rest with businesses. Far more taxpayers are already paying Capital Gains Tax (CGT) due to restrictions in the Annual Allowance which has dropped from £12,300 to £3,000 since 2022. With effect from Budget Day the rate of tax payable on shares and commercial property has been aligned with the higher rates that were due on residential property at 18% or 24%. In addition, the preferential Business Asset Disposal Rate which applies to the first £1m of business assets on sale/retirement will be increased from 10% to 14% in April 2025 then to 18% in 2026.

Finally, the biggest tax increase of all will again be met by businesses, the part of the economy which does most to stimulate growth. Employers’ National Insurance contributions will rise from 13.8% to 15% in April 2025 and the “threshold” at which such contributions start will fall from £9,100 to £5,000. Some of this will be offset by an increase in the small business “Employment Allowance”, which goes up by £5,500 and which should protect smaller business but nonetheless this change is expected to cost businesses some £25Bn annually. A minimum cost of £615 per employee for everyone earning over £5,000 before the 1.2% increase on earnings above £9,100 is taken into account. There is also a 6.7% rise in the National Living Wage, Another Budget “giveaway” funded wholly by the private sector will also have some effect on profitability, either directly where staff are employed on low wages or indirectly because of the effect it can have along the whole wage structure.

There really is very little good news in this Budget other than that some of the perceived areas at risk were not targeted. Business IHT reliefs were reduced but not abolished. There is no change in the CGT uplift on death which would have been a nightmare to administer and there was no increase in the Income Tax higher rates. Similarly, some planning tools such as CGT holdover and rollover reliefs have not been withdrawn, nor has the IHT seven-year gift rule been extended.

This Budget may well be seen as being particularly divisive, pitching pensioners against their grandchildren, investors and business owners against workers and town against country. Many people may initially feel largely unaffected by the changes, but a significant number will soon realise that it isn’t that straightforward. “Taxpayer behaviour” is something which does not lend itself to Treasury modelling, but it is clear that for those who are in business or whose Estates are within or close to the IHT limits, tax planning is very much back on the agenda. It seems certain that almost every Will written in the last ten years will need to be updated in the light of these new rules.

If you require any tax advice, whether personal or business, please contact us at Kathryn Gigg Chartered Accountants, Hunstanton on 01485 534800 or kate@kathryngigg.co,uk.

N.B. Article written 31.10.2024

© Kathryn Gigg Chartered Accountants 2024