Back in September we wrote an article outlining some of the measures the Chancellor might take to increase taxes. We speculated that with Labour ruling out changes to Income Tax, National Insurance Contributions, VAT and Corporation Tax, which represent 75% of the UK tax base, IHT and CGT could well be in her sights. In the event we were right.
Ms Reeves did increase NIC but not for employees only for employers. There was also reasonable speculation surrounding a new wealth tax which would fit with the Labour party’s philosophy. Perhaps suprisingly this didn’t materialise.
What did transpire will have far reaching consequences for personal wealth particularly for farmers and small business owners. Savings tax, ISA limits etc stayed the same. A proposed new addition to ISA’s, the British ISA, with an allowance of £5,000 was a measure the Conservative government were going to introduce but it has been scrapped by Labour. It is investors rather than savers who will bear the brunt.
Lets look at the the main measures.
VAT
As was widely advertised the Chancellor confirmed that private schools will now be subject to VAT. It seems highly likely the additional costs will be passed on by the schools to parents. At this stage we cannot know the precise impact but it seems parents will have to find the cash for increased fees. This applies from 1st January 2025.
Capital Gains Tax (CGT)
With effect from 30th October 2024, the rates of CGT will rise from 10% (basic rate tax payers) and 20% (higher rate tax payers) to 18% and 24% respectively for disposals made on or after that date. There was no change made to the rates of CGT for gains on disposal of residential property, which means once again we have alignment in relation to CGT rates. The chancellor also confirmed that the annual CGT exemption would remain £3,000 for 2025/26, and £1,500 for Trusts.
Business Asset Disposal Relief (BADR), the relief mainly small business owners benefit from when selling their businesses continues but with some changes. The lifetime limit for BADR gains will remain £1m, but the CGT rate that applies to BADR will rise from 10% to 14% from 6 April 2025, and then 18% from 6 April 2026.
Stamp Duty Land Tax
For those investing in property (England & Wales) the additional dwellings supplement charged on purchasing second or consequent properties will rise immediately from 2% to 5%. The rate in Scotland currently is 6%. As a devolved matter it will be for the Scottish government to propose any changes in their budget.
Inheritance Tax
There are a number of changes to Inheritance Tax (IHT) that will impact on both inheritance itself and on pension income.
In terms of private pensions, the government intends to change legislation to bring unused pension funds and death benefits payable from a pension into an individual’s estate for IHT purposes from 6 April 2027. This reiterates the pledge of the new government to restore the principle of pensions being used for retirement as opposed to tax-efficient estate planning.
This measure will require people to look at how they fund their retirement and how they plan to pass on their wealth. For those whose main interest is to pass their pension on to their spouse, the spousal exemption means no change but where it was planned to pass the pension pot on to the next generation further or different planning will be required.
The measure that has gained the most press attention is the change to agricultural relief (APR) and business relief (BPR). Changes take effect from April 2026. Previously shares in non quoted private companies, mostly small and medium sized privately owned companies, were free of IHT when they had been owned for 2yrs. Similarly, agricultural property benefited from the same reliefs.
There will now be a relief limit of £1m. This is a combined relief so anyone owning both business and agricultural assets will have a total allowance of £1m. any excess over the £1m given relief at 50%.
It was also confirmed that from 6 April 2026, the rate of business relief awarded to unlisted shares, such as AIM and EIS, will reduce from 100% to 50%.
Despite government assurances and some frankly dodgy looking calculations on what constitutes small farms, both the APR and BPR measures will have a profound effect.
Depending on their personal political leanings newspapers and commentators will tell you these changes are an excellent way to tax the rich or armaggedon for farmers and small business owners.
The truth is that apart from the financial implications for the individuals affected these are regressive steps for both the UKs agricultural and business economies. These reliefs were not originally introduced as some kind of tax perk for the super rich but rather as a practical measure to protect the UK economy.
Business Property Relief protected small and medium sized businesses from the prospect of being broken up, sold off or even closed down to meet IHT bills thus preserving jobs, economic activity and the tax base whilst simultaneously saving the country excess unemployment costs.
Agricultural Property Relief also protected employment and the continuation of food production by those, often generations of families, best placed to provide it. Farms which may be worth £millions on paper do not produce anything like the income that land values might suggest. Few farmers then can afford to pay IHT without selling off land.
This leads to the breaking up of farms as land is sold to pay tax bills. Farms become smaller and less viable. Generations of farmers will disappear as conglomorates take over farms and more land will disappear under new housing and industrial development. At the same time food security in the UK will be reduced whilst food importing costs rise and the UKs already weak balance of payments position continues further into negative territory.
Early financial planning to mitigate these changes as far as possible will be needed.
For individual investors the removal of the 100% relief from Alternative Investment Market (AIM) qualifying stocks and Enterprise Investment Schemes (EIS) will be a blow. Many investors in the qualifying AIM stocks do so via investment portfolios professionally managed by specialised investment companies.
Unlike small companies or family farms the AIM and EIS as investment plans may be seen as more legitimate targets. These plans are primarily used by the comparatively wealthy to avoid IHT. However BPR was extended to these schemes to encourage investment in new and often high risk UK businesses. reducing the tax incentive will inevitably lead to a reduction in new British start up companies.
Conclusion
Was your piggy bank raided? Well, not directly for most, but the target of the tax rises was always expected to be the well off rather than the small saver or investor. Small savers are barely affected. Small investors though, those potentially liable for CGT, will lose out with the increase in the CGT band rates particularly basic rate taxpayers who will see an 80% increase in the tax rate from 10% to 18%. With the CGT allowance frozen again at a miserly £3,000 more small investors than ever will be caught out.
The real losers amongst the general population will be those beneficiaries who will see a reduced inheritance from pension schemes and AIM investments. The other losers are the generations that have run farms and family businesses. But the country and the economy are losers too.
