Collyer Bristow’s Tax and Estate Planning team provide their analysis on the Labour government’s Autumn budget announced on 30 October 2024

After weeks of speculation, leaks, and briefings, Rachel Reeves was the first female Chancellor of the Exchequer to deliver a Budget Statement to the House of Commons.  As expected, her speech was sombre, and intensely political – criticising the Conservative Party now in Opposition for what she repeatedly called their 14 years of failure and promising to “fix the foundations to deliver change”, especially in improvements in public services.  The government’s Budget measures are predicted by the independent Office for Budget Responsibility to generate nearly £40bn in additional revenue (that is, tax rises) in the 2025/26 tax year.

Notably, Labour’s key manifesto tax pledges (abolishing the ‘non-dom’ tax regime; adding VAT to private school fees; and increasing tax on private equity ‘carried interest’ payments) all made it into the Budget – despite apparently well-sourced recent press commentary indicating that the Chancellor’s plans were encountering difficulty with the OBR’s more conservative predictions.  The ‘non-dom’ changes, for example, are now valued at £4.2bn in 2028/29, not the £5.2bn anticipated in Labour’s manifesto. Conversely, adding VAT to private school fees is now said to be worth an additional £1.665bn in 2028/29 – more than the £1.5bn hoped for by Labour, despite the fact that this policy, in particular, was reported to be in difficulties over the fear it would raise much less than predicted – or even end up costing money.

Certainly, assumptions about the value to the Exchequer of the ‘non-dom’ changes and parents’ willingness to pay higher private school fees, for example, will be subject to very significant variation depending on behavioural changes by those affected.  Indeed, the Office for Budget Responsibility have considered this exact point directly: “The [revenue costings for IHT, CGT and income tax] are among the most uncertain in the policy package, reflecting the range of potential behavioural responses, the sensitivity of the yield to the decisions of a small number of high net-worth individuals, and interactions across measures.”

As ever, it will be very difficult to assess the overall economic effect of the Budget changes in real time, and anecdotal experience of clients’ intentions will be the first guide as to the success of this Budget (measured against its aspirations) – certainly, that is true in terms of inward investment by internationally mobile High Net Worth private clients.  At best, it remains to be seen whether this is the Budget for growth promised by Reeves: as the Tories recently found out, all governments will eventually come to be judged on their record in office.

1. Non-dom reforms

Under pressure, the Government has kept its manifesto commitment of abolishing domicile from the UK tax code, replacing it with a purely residency-based regime. The fact that taxpayers have effectively known about these changes since March may have allowed the water to reach its boiling point gradually before many of the people formerly known as ‘non-doms’ hopped out of the UK. Despite that, we know from our own experiences that some internationally mobile high net worth individuals and their families and businesses have already left the UK, while others were waiting to see what this Budget brought: for many of the latter, it seems unlikely that Reeves’ announcements gave them many reasons to stay, and we predict further departures before April 2025 and in the coming years.  Similarly, soundings from international clients and referrers cause us to worry that fewer wealth creators will seek to move to the UK now or in coming years.

Reeves stated her view that the changes she announced would constitute an “internationally competitive residence-based regime”.  This is misguided and inaccurate: whilst we have looked hard to find the silver linings for some clients, the truth is that the new arrangements will be less attractive than those they replace – in both absolute and relative terms.  First, may non-doms, who can choose to live elsewhere, will conclude that the imposition of a higher UK tax burden makes the UK insufficiently desirable as a place to make a home and a business; secondly, international comparators are frequently far more generous in their incentives to wealthy foreigners (the Italian regime is just one example of that).  The UK does still have ‘pull’ factors which could, in the right circumstances, draw inward investment: the risk is that those are swamped by the bad-news messaging inherent in this Budget, and/or that those who might otherwise consider moving to the UK are dissuaded because they think it no longer represents good value for money.

The four-year FIG regime

From 6 April 2025, the remittance basis of taxation is to be replaced by a new four-year regime for those becoming UK resident for the first time (or after at least 10 years of non-residence). During that period, upon the relevant claim being made in a taxpayer’s self-assessment tax return (or within the following 12 months), his/her specified foreign income and gains will not be subject to UK tax in that year.

Controversially, perhaps, the new rules appear to introduce a concept of “qualifying foreign income”, which must be identified (i.e. disclosed to HMRC) for the regime to apply to it.  If so, this will vastly increase HMRC’s awareness of the non-UK income/gains of all UK residents.  Currently, remittance basis users must only disclose foreign income and gains that they remit to the UK, with no obligation to disclose non-remitted funds. Moving forwards this appears to be inverted, with taxpayers having to disclose that which they are seeking to shield from tax. This is a significant increase in the level of disclosure required for taxpayers.

Whilst the 4-year period is significantly shorter than the current 15-year window for the remittance basis, the breadth of the 4-year is, at least, more generous to those with overseas wealth.

Temporary Repatriation Facility

It is welcome that the Government plans to extend the Temporary Repatriation Facility (TPF) to three tax years from 6 April 2025, allowing non-domiciliaries to remit foreign income and gains previously shielded by the remittance basis to the UK at a rate of only 12% (15% in 2027/28).  This facility will be used by wealthy taxpayers who might accept that paying only 12% to bring overseas wealth in the UK is better than not remitting it at all.

Of course, the risk of bringing capital to the UK is that it would, on any basis, be subject to IHT on death, which those with a choice will wish to avoid (see below).

Inheritance Tax

Inheritance Tax will be levied on foreign individuals on the expiry of the new 10-year UK residency period. During the initial 10 years, the individual’s non-UK assets will remain outside the scope of IHT. However, after 10 years his/her worldwide wealth will fall within the scope of charge.

Those same rules then also apply for individuals leaving the UK. Those who have been UK resident for between 10 and 13 years will remain exposed to IHT for three years from the tax year in which they ceased to be UK resident.  An additional year is then added for each further year above 13 years spent as a UK resident, up to a maximum of 20 years residence, when the total tail will be 10 years. We note no exemption from these rules for individuals who cease to be UK resident prior to 6 April 2025.

Crucially, this will include “excluded property trusts”. This includes those trusts previously settled by non-domiciled settlors well before today’s changes. From 6 April 2025, trusts with a long-term resident settlor (i.e. a person who has been resident in the UK for 10 years or more) will no longer benefit from excluded property status for IHT purposes. This is proving to be amongst the most controversial changes. Anecdotally, many of our clients accept that UK taxation of worldwide income and capital gains becomes reasonable after an initial tax-efficient period. However, IHT on worldwide wealth, including wealth placed in excluded property trusts, is definitely the straw that will break the back of many non-dom camels.

In better news, for foreign trusts where the settlor is either (a) not resident in the UK or (b) dead (provided that, if dead, he/she was not a long-term UK resident), it will come as a relief that exposure to UK taxation remains substantially unchanged.  So such trusts will remain an effective way of deferring UK tax until the point of receipt by a UK-resident beneficiary, whilst also shielding trust capital from IHT.

Non-dom winners

Whilst the focus for many affected non-doms and their advisers will inevitably – and understandably – be the higher tax costs that will come with long-term residence in the UK, there will be some beneficiaries of the Budget changes. These will include individuals returning to the UK after more than 10 years abroad. Currently, those individuals are brought back within the scope of all UK taxes within two tax years of their return. However, in keeping with Labour’s promise to remove domicile as a relevant tax concept, there appears to be no distinction in the new rules between these ‘returning domiciliaries’ and those taking up UK residence for the first time (or after a significant break): in future, they will be treated in the same way as anyone coming to live in the UK.  In other words, this essentially opens up the replacement for the non-dom regime even to those who are domiciled in the UK.  It is a rare and welcome example of the Treasury taking the rough with the smooth, and applying the logic of its changes fairly, even where it is disadvantaged by doing so.

2. IHT reforms

In what must have been a deliberate, knowing, choice, Inheritance Tax was not one of the taxes declared immune from rate increases in Labour’s manifesto. As such, it was widely predicted that IHT would increase in this Budget.

Lifetime giving and tax-free allowances

Many will be relieved that the fundamental infrastructure of Inheritance Tax remains the same.  The tax-free allowance (the “nil rate band”) remains unchanged at £325,000. The widely-disliked and complex additional “residence nil rate band” of a further £175,000 for individuals passing residential property to their children or other lineal descendants also remains – thus missing an opportunity to reform and simplify the rules. Married couples will continue to be able to transfer their available tax-free allowances to each other, and gifts to a spouse or civil partner continuing to pass tax free.

Historically, the exception to this was in the case of a domicile ‘mismatch’, where assets were transferred from a UK domiciled spouse to a non-domiciled spouse. With the abolition of domicile, so went with it the ability of the recipient spouse to elect to be taxed as a UK domiciliary, which they could then subsequently shake after four years of non-UK residence.  In the future that spouse will now need to be non-resident for 10 years, irrespective of how long they had been UK resident to that point.

Similarly, despite fears over the abolition of the seven-year gifting rule, this too has survived the Autumn Budget unchanged, meaning lifetime giving remains an effective strategy for IHT planning. This means that, as now, IHT will not be payable on gifts where the donor survives them by seven years. Those seeking to emulate Anne Robinson, who recently sought to avoid IHT by giving £50m to her children, will be pleased.

Agricultural and Business Property Reliefs

As predicted, Agricultural property relief (“APR”) and business property relief (“BPR”) were deemed fertile ground for the deepest cuts.  Many farmers will consider this Budget to be an especially grievous attack on their livelihoods, compounding issues over the replacement of the EU’s Common Agricultural Policy payments, the (at best) marginal profitability of farming as an industry, DEFRA’s now further-reduced funding settlement, and the already rock-bottom low morale of the sector as a whole.

Similarly, those hoping that the UK might reverse its lack of economic growth (relative to the US, for example) by attracting innovative, high-growth, companies to the UK will be dismayed by what appears to be an ideological attack on business owners in the restriction on BPR. In practical terms, many family-owned farms and businesses will face being broken-up after a death, knock-on effects of which are likely to include financial instability for “UK PLC” and job insecurity for workers. By the Government’s own estimates, some 25% of farms and nearly 50% of businesses will be affected by these changes.  As over 99% of UK businesses are small, family-owned, enterprises, the impact of this tax raid, which will be sharply felt by those affected, ought not to be underestimated.

Some commentators feared the government might abolish APR and BPR in their entirety, but the Autumn Budget has not gone that far. Instead, their value to any given taxpayer is subject to a ‘cap and collar’ arrangement. From 6 April 2026, only the first £1 million of combined agricultural and business property will benefit from 100% rate of relief; any value over £1 million will benefit from a reduced 50% rate of relief.

Notably, the new allowances combine both agricultural and business property, with the allowance applying proportionately across any qualifying assets; rather than providing separate streams of relief.  Allowances will not be transferable between spouses or civil partners.

Assets only qualifying from a 50% rate of APR or BPR (land farmed by tenants under a pre-1995 agricultural tenancy, or premises used by a business owned by the taxpayer, for example) remain unaffected.

For the first time, from 6 April 2025, the scope of APR will be extended to include land managed under an environmental agreement with the local authorities or UK government. Land managed for ecological benefits, for example those involved in rewilding, will not automatically benefit from this extension to APR unless they are part of a managed scheme – though there is now an avenue to such relief where farms and estates are managed for ecological purposes in accordance with a qualifying government scheme.

The new £1 million APR/BPR relief threshold will also apply to trustees of settlements containing qualifying assets on a ten-year anniversary charge or an exit charge. If a settlor created multiple trusts comprising qualifying business or agricultural property, then from 6 April 2026 each trust will be entitled to a £1 million allowance. However, any trusts created after 30 October 2024, will have the £1 million allowance divided proportionately between them.

As noted above, it remains to be seen how those farms and businesses that will be affected by the change will cope with the additional and unexpected tax.  In some cases, it may mean the breaking up of family businesses – especially farming businesses – after a death to be able to afford the tax.  In the case of farms, especially, this might even mean the forced sale of the family home.

Unusual and somewhat complex anti-forestalling measures are being introduced so that the restricted APR and BPR allowances coming into effect from 6 April 2026 will also apply to any lifetime transfers into trust made on or after 30 October 2024 where the transferor then dies before 6 April 2026. These may well suffice to disincentivise business owners from taking steps to capitalise now on APR/BPR while they theoretically (but not necessarily in practice) remain available in full.

AIM shares

To date, BPR has applied to AIM-listed shares, meaning that an industry has sprung up of selling packaged IHT-relieved AIM portfolio products, which was arguably an unintended consequence of the previous generosity of the BPR regime.  From 6 April 2026, BPR on shares designated as not listed on the markets of recognised stock exchanges, including AIM shares, will be capped at 50%, meaning that affected products and portfolios will now be taxed at 20% (at current rates).

Pensions

The government will bring unused pension funds and death benefits payable from a pension into a person’s estate for Inheritance Tax purposes from 6 April 2027.  While not many contributed to their pensions solely due to their (previously) favourable IHT treatment, the knowledge that pensions would pass IHT-free was a comfort to some.  With these changes, that reassurance will go, and more estates will find themselves liable to pay Inheritance Tax (with the increased filing complexity and costs that inevitably come with that).

As part of these changes, pension scheme administrators will become liable for reporting and paying any inheritance tax due on unused pension funds and death benefits.

The Government is consulting on this change, and details are currently sparse.

3. CGT reforms

The Capital Gains Tax changes were largely in line with what many expected, while the worst fears of a 39% headline rate were not realised.  The main rate is increasing from 10% to 18%, and the higher rate from 20% to 24%.  The residential property rate remains unchanged at 24%.  Taken in isolation, the CGT changes are relatively modest, and would not of themselves cause undue concern: they do not “move the dial”.  But in the context of the Budget changes as a whole, which are intentionally targeted at wealth creators as a group, their effect is magnified.

Rate increases

Importantly, these [CGT] changes are effective immediately, and any disposals made on or after midnight on 30 October 2024 will attract the new rates.  This is only the second time in recent history that there has been a mid-year CGT rate rise, and both HMRC and accountants’ tax software packages will have to move quickly to allow for the change.

‘Anti-forestalling’ of this kind (i.e., Finance Bills retrospectively making tax increases effective immediately as from the date of the Budget) has become an article of faith at HMRC and HM Treasury, seemingly because they see any attempt to pre-empt rate increases by triggering disposals before they come into effect as being tantamount to ‘avoidance’.  This is despite the fact that such disposals, if they were allowed to take place, would bring forward significant revenue into the Exchequer.  Arguably, anti-forestalling provisions of this sort are self-defeating if their objective is to maximise (voluntary!) tax revenue for the Exchequer in the shortest possible timeframe.  Whilst the CGT rate changes in this Budget are probably not so severe as to dis-incentivise CGT taxpayers from making disposals at all in the coming years, it is generally true to say that where the timing of disposals is discretionary, taxpayers will be inclined to postpone their transactions, thus deferring paying tax on their gains for as long as possible – not least, in the hope that the rate may decrease again in the future.  The Exchequer may well end up being the loser overall.

Investors and entrepreneurs

From 6 April 2025, the rate of charge for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief) and Investors’ Relief will increase to 14%, and will increase again to match the main rate of 18% (including for higher-rate taxpayers) from 6 April 2026.  Furthermore, the lifetime limit for Investors’ Relief will be reduced from £10m to £1m (matching that of BADR) for all qualifying disposals made on or after 30 October 2024.  This will, again, disincentivise those considering investing in UK businesses from doing so.  The only good news here is that those who have already made use of these reliefs won’t be punished by eating into their lifetime limit.

Private Equity “carried interest”

Labour said in its election manifesto that the way carried interest is taxed would change.  The Chancellor has confirmed it will – twice.  First, as an interim measure, from 6 April 2025, carried interest will be taxed at a new CGT rate of 32%.  Then, from April 2026, it will be taxed at the taxpayer’s income tax rate, but subject to a multiplier of 0.725.  For those in the private equity world, this [these CGT increases] will feel like a massive tax hike.

Limited Liability Partnerships

In one of the numerous unannounced and less-headline-grabbing changes in this Budget, from today, those contributing assets to a Limited Liability Partnership (who can presently qualify for relief from CGT) will suffer a clawback of tax if the LLP is later liquidated, and its assets disposed of to a contributing member (or a person connected to him/her).  Whilst this may be a response to a certain type of aggressive tax avoidance scheme, the changes are widely-drawn, and the risk is that it will have a wider impact than apparently intended, also catching many innocent situations.

4. UK property

With immediate effect from 31 October 2024 (the day after the Budget announcement), the higher rates of SDLT that apply to an individual purchaser who owns (or will own) two or more properties will increase from 3% to 5%.  Labour’s election manifesto had pledged to amend the SDLT regime to increase the additional rates paid by non-UK purchasers – but not the higher rates for individuals owning more than one property (though a self-serving statement that this higher rate is often paid by non-residents is made in the Budget notes, presumably to spare the Government’s blushes about another broken manifesto pledge).  In fact, the additional rate applies to both UK and overseas purchasers.  This means that a non-UK-resident individual buying a second or subsequent property now faces a top SDLT rate of 19% (for the portion over £1.5m).

A transitional provision applies to purchases completing after 31 October 2024 on the basis of contracts exchanged before that date (provided they are not subsequently varied), and those transactions will remain subject to the old rates.

Meanwhile, the flat rate of SDLT for companies and other non-natural persons purchasing high value properties has also risen from 15% to 17%.

The Government had been warned that further changes to the CGT rate for residential properties risked destabilising the UK’s property market, and the CGT rate for properties (other than those qualifying for the principal private residence relief, which remains in unaffected) remains at 24%.

5. Other changes

One of the striking points about this Budget is the sheer number of smaller, non-headline, changes which have been put out in addition to the more major changes summarised above.  It has the feel of a Budget by a detail-obsessed micro-manager.  In consequence, the details of many of those changes are not yet well understood, and further updates will follow as we review them.

6. Final comments

The Budget was billed as “fixing the foundations”: ‘painful’ tax rises were necessary, the Government told us, to put the necessary investment into struggling public services, and to protect “working people” (as self-defined, apparently) from tax rises.  It remains to be seen how those given the greatest burden by this Budget will respond, and consequently whether the economic growth promised by the Chancellor will materialise.  The UK as a whole has a vested interest in it doing so.

Our task now, as our clients’ solicitors, is to guide them through the new tax landscape – explaining the practical effects of the changes made by the Government, and looking for opportunities to support them, their families and their businesses as they consider what steps to take now.