I shall just make a few comments on the Chancellor’s Budget announcements yesterday. There are many free analyses on the web from the national press and investment companies.
Many of the advance rumours turned out to be true although the worst predictions did not materialise. My stock market portfolio went up by 1.4% on budget day mainly from rises in small/mid cap shares although most of that disappeared this morning.
There was clearly some panicking about potential rises in capital gains tax before the budget causing people to crystalise gains. Yes there are rises – The main rates of CGT are currently charged at a lower rate of 10% and a higher rate of 20%, and these will be increased to 18% and 24% respectively from 30 October 2024. These new rates will match the residential property rates, which are not changing. So there will be some impacts on my personal tax bill as I pay capital gains tax on some share sales in some years. But I can always postpone selling shares to avoid the tax or move them over time into our ISAs where the generous £20,000 annual investment allowance remains in place.
But what about Business Property relief against IHT available on some AIM shares you ask? Removal of this was seen as likely to badly damage the AIM market. This is the key paragraph in the Chancellor’s statement: “The government will reform agricultural property relief and business property relief from April 2026. In addition to existing nil-rate bands and exemptions, the 100% rate of relief will continue for the first £1 million of combined agricultural and business assets to help protect family farms and businesses, and will be 50% thereafter. The government will also reduce the rate of business property relief to 50% in all circumstances for shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM”. This will affect around 0.3% of estates each year including mine.
There is a new limit on Agricultural Property Relief and Business Property Relief – no Inheritance Tax will be payable on the first £1million of combined agricultural and business property, to help protect family businesses and farms. Thereafter, Inheritance Tax will be payable at half the standard rate (meaning 20%). For quoted shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM, this same rate will apply at all times. Carried interest will now be taxed within the Income Tax framework, but at 72.5% of an individual’s marginal rate. Furthermore, the rate for Business Asset Disposal Relief (Entrepreneurs Relief) and Investors’ Relief will increase from 14% to 18%.
I don’t own any farms, but Jeremy Clarkson is not happy. He said on Twitter (X): Farmers. I know that you have been shafted today. But please don’t despair. Just look after yourselves for five short years and this shower will be gone”.
Comment: clearly many wealthy individuals invest in farms as a tax avoidance wheeze. These are businesses that often lose money and are lifestyle choices to a large extent. I have little sympathy for encouraging such businesses. The money would be better invested in new high-tech productive companies.
The government is also removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pots into the scope of inheritance tax from April 2027, which will affect around 8% of estates each year. This is another change that will impact me – or to be more exact, my offspring.
Bearing in mind that the Chancellor chose to raise £40 billion in new taxes, the most damage has fallen on employers National Insurance and the freezing of allowances which will bring more individuals into the tax regime. However the promise is that the freezes in threshold rates for National Insurance and Income Tax set in the previous government will end. From April 2028, these personal tax thresholds will be uprated in line with inflation. Let us hope the Government remembers that promise.
The rise in employers National Insurance and the minimum wage will hit retail and hospitality businesses so watch out for the impact on such shares – generally you have to be very careful with those in modern times anyway.
There is of course still no indexation of capital gains so we will still be paying tax on illusory gains.
The Chancellor Rachel Reeves commenced her speech in Parliament with the usual political platitudes and rhetoric. She spent most of her time criticising the previous Conservative Government rather that outlining her plans for a brighter future. Higher taxes will clearly damage future economic growth. What is the extra money to be spent on? On defence is one thing and on the NHS but I am deeply sceptical that the NHS can benefit from more cash. The problem in the NHS is incompetent management. More cash might simply be wasted.
For full details of the Autumn 2024 budget see: https://www.gov.uk/government/publications/autumn-budget-2024
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
Thank you Roger, for the concise summary and links to the official budget document.
The statement on the change to personal pensions is huge and described as a change to prevent pensions being used for IHT planning. Okay, assuming this is the intention, and 40% is taken on death, will the income tax paid by the inheritors on drawing the amount inherited be forgiven, making the inheritance of a pension the equivalent of other assets? I have seen reports that income tax will still be taken making the effective rate on pension inheritance typically 64% (40% on death, then, typically a further 40% income tax on the inheritor receiving the money. Of a £100,000 pension, £40,000 paid on death and of the remaining £60,000 a further 40% [£24,000] paid in income tax).
Surely this cannot be the case – for those of us in the private sector unfortunate enough to have to build up our own savings, it would become a strong disincentive to save in a pension at all.
What should happen, is that on death the pension would be liquidated, passed to the estate, taxed at 40% and the remainder passed to inheritors free of further tax, like a sum of cash in a bank account or a shareholding would. Anything else would be outrageous and relatively quickly kill the UK private pension industry. The long term effect would be for many to become reliant of the state.
I agree that it is not totally clear how this new rule is supposed to operate. But in essence at the moment you can pass pension funds to other folks on death if they are written in trust (depends on age at death I think – I am not really competent to advise on this complex tax area. The inheritors only pay tax on the pension funds when they are withdrawn – so effectively the pension is passed on without charge. The intention appears to be to block that so the pension fund is caught by IHT. This drives a coach and horses through a lot of IHT tax planning.
Hopefully HMRC will clarify this in due course. But it just shows that tax system is now so complicated that it is very difficult to understand.