Last year’s October Budget brought about significant changes to the tax legislation in the United Kingdom but what can we expect from this year’s October Budget.
Recap – October 2024 Budget
Last year the Chancellor announced significant changes to the tax regime in the UK, particularly in relation to Inheritance Tax (“IHT”).
IHT is a tax most commonly levied on death, but it is also levied on Chargeable Lifetime Transfers and failed Potentially Exempt Transfers. According to the Government website the October 2024 Budget sought to “deliver a fairer and less economically distortive tax treatment of inherited wealth and assets”.
Arguably, the effects of the changes announced last year have not yet had their full impact due to the staggered nature of the changes and the slowness of the Government in producing the draft legislation. Nevertheless, several high-profile high net worth individuals have left the UK already, including the co-owner of Aston Villa football club, Nassef Sawiris.
Some of the notable changes announced last year are briefly summarised below.
Pensions
From 6 April 2027 an individuals’ pension fund will fall into their taxable estate on death and therefore be subject to IHT. Prior to this date, an individual’s pension fund can be excluded from their taxable estate on death and therefore not be subject to IHT.
Inheritance Tax
The Chancellor announced that the concept of domicile for IHT purposes will be replaced by a residence-based system. Since 6 April 2025, IHT has been levied on the basis of UK Tax residence.
Agricultural and Business Property
From the 6 April 2026 the Government will enact significant changes to Agricultural and Business Property Relief. Until this date, Qualifying Assets can benefit from 50% or 100% relief from IHT. However, from April 2026, only the first £1 million of Qualifying Assets will benefit from 50% or 100% relief. Qualifying Assets over the £1 million allowance will benefit from relief at 50%.
What next?
Though individuals would be ill advised and unwise to act on the basis of hearsay or speculation, it is interesting to consider the rumoured changes which may be announced in the upcoming Budget.
The Financial Times has recently reported that Rachel Reeves has allegedly been exploring reforming Capital Gains Tax (“CGT”) levied on real property. CGT is a tax which applies to many assets which are disposed of at a gain from their acquisition value. Most commonly CGT applies when real property and shares (not held in an ISA) are disposed of.
Though CGT would commonly be paid on the disposal of an individual’s home if it is disposed of for more than the value it was purchased at, relief known as the Principal Private Residence Relief (“PPRR”) often applies. This is a relief from CGT where an individual sells their home which they have lived in for the entirety of the period of their ownership. Other grounds must also be satisfied for the relief to apply however, this relief applies for the majority of homeowners which means that CGT is not paid.
Nevertheless, the Chancellor is said to be considering what has been coined by some as a “Mansion Tax”. This tax would apparently apply to homes which sell for more than £1.5 million. Homes which sell for over this amount would supposedly lose the application of the PPRR.
There have also been reports that the Government is considering changes to Stamp Duty affecting properties valued at over £500,000.
Rachel Reeves has reportedly also been considering changing the way that IHT applies to lifetime gifts. Under the current regime, if you survive a period of 7 years from making a gift, there is no IHT levied on the amount of the gift and your Nil Rate Band (“NRB”), currently £325,000 per person, will remain fully available on your death. However, there have been reports that the Government is considering placing a cap on the amount that people can give away “tax free” during their lifetime. There has been little speculation on the amount of this cap, but it may be assumed that the cap could match the NRB.
Arguably, both the proposed changes to SDLT and lifetime giving could have the opposite of the desired effect on the UK property market especially at the lower end of the market. First time buyers may be prevented from getting onto the property ladder as their parents may be discouraged from giving them a contribution towards their deposit and the SDLT increases could make it unaffordable.
This article has been written purely on the basis of commentary in the press and opinion and therefore the contents of this article does not constitute legal advice and is provided for general information purposes only. The contents are copyright of Lee Bolton Monier-Williams LLP. All rights reserved.
Sources
Rachel Reeves explores reform of capital gains tax on expensive houses
Inheritance Tax on pensions: liability, reporting and payment — Summary of responses - GOV.UK
UK regions where property tax proposal could hit homeowners hardest MoneyWeek