Inheritance Tax

As many professionals predicted, the broadest changes were brought in for inheritance tax (“IHT”). 

Firstly, the government has left the nil rate allowances for IHT unchanged. Since 2009, each individual in England and Wales can pass on £325,000 without any IHT payable. An additional residential allowance can be claimed of £175,000 for people who own their property and leave this to their direct descendants. This raises the nil tax allowance to potentially £500,000 for some individuals. 

The spousal exemption remains unchanged, so transfers between spouses and civil partners will not be subject to any IHT. Furthermore, spouses or civil partners can inherit any unused parts of the allowances set out above. 

This has been the status quo for many years and the government has confirmed that this will remain unchanged until at least 2030. As property values and inflation rise, more estates will face taxes because the majority of assets in an estate above the allowances are taxed at 40%. 

One of the biggest changes to IHT is that the unused pension pots for individuals will be brought into consideration for IHT when they pass away and subject to the same allowances above. 

This means that instead of pension pots being passed on to beneficiaries without any IHT to pay, they will be treated in the same way as bank accounts and investments. This change is scheduled to take effect from 6 April 2027. As a general Will and Estate planning point, a review will be of particular importance over the upcoming 18 months once the application of IHT to pensions is established and we are able to ascertain its implication on many.   

Pensions still offer benefits however, people might now choose to spend their pensions during their lifetime instead of saving them to pass on to beneficiaries at a low tax rate. Wealthier individuals may choose to diversify away from pensions into other forms of investment. 

One key point about pensions is that IHT will apply in addition to the existing tax rules on pension death benefits, potentially leading to an effective tax rate of up to 67%. 

Agricultural and Business Property Relief

The Labour Budget has also made changes to Agricultural Property Relief (“APR”) and Business Property Relief (“BPR”). Previously, any qualifying agricultural property would have received relief from IHT at 100% and certain business assets would also receive relief from IHT at 100% whilst other business assets would receive relief from IHT at 50%. 

These reliefs would apply with no upper limit and potentially allow millions of pounds of assets to be effectively exempt from IHT. A £1m cap now applies to the total value of assets in an estate eligible for APR and BPR. Assets above this cap will get 50% IHT relief, resulting in a 20% effective tax rate on their value over £1m. These changes will take effect from 6 April 2026. 

It’s unclear if family businesses and farms can use the installment option to pay new IHT liabilities. If they do not receive this option, then it is anticipated that estates will severely struggle to raise finance and we may see a rise in IHT loan companies. 

APR and BPR relief have two important points to note. 

• Firstly, APR and BPR reliefs will be applied in proportionate shares where an estate contains both types of property. If there’s £2m in APR/BPR property with £500,000 eligible for APR and £1.5m for BPR, then £250,000 of the £1m limit applies to the APR assets and £750,000 to the BPR assets
• Secondly, the £1m limit isn’t transferable between spouses or civil partners – each person must use it or lose it.

The 7-year rule for lifetime gifts still applies to assets with APR and BPR. The owner won’t pay tax on transferring £1m or more during their lifetime unless they die within 7 years.

There are many questions about trusts holding farming property. As a result, the government have promised a consultation to clarify how the policy applies to property in trusts.

Pre-existing trusts seem to get their own £1m allowance, but trusts set up after 30 October 2024 will share a £1m allowance. This will be particularly relevant to periodic and exit charges for trusts.

It’s unclear if all pre-existing trusts will get their own £1m allowance or if only those with property eligible for APR and BPR will qualify. Currently, we assume the latter but whether property subject to APR or BPR could be added to a pre-existing trust to top it up to £1m remains to be seen.

Lastly, assets invested in the Alternative Investment Market (AIM) will now receive only 50% relief. Previously, they received 100% IHT relief under BPR.

Professionals have had mixed responses to these proposals. Many experts see opportunities for smart planning. Families can pass on a business before death or use trusts, which have a £1m limit for APR and BPR assets. Rumours suggest that the National Farmers Union is planning a protest in Westminster in December over changes to APR.

Abolition of the Non-Domicile Regime

Many international individuals and advisers expected the confirmation of the Conservative party’s Spring budget changes. Namely removing the Remittance Basis rules, which allowed non-domiciled individuals to pay income tax and CGT on foreign income and gains only when those funds were brought into the UK. The Labour Party announced plans to replace domicile with a residence-based tax system. 

Under the new rules, anyone, including British citizens, who hasn’t lived in the UK for the past 10 years can bring foreign income and gains to the UK tax-free for their first 4 years of residence. 

Following that 4-year period, all income and gains (onshore or from foreign sources) will be subject to tax in the UK. Individuals must claim the 4-year tax-free period from HMRC, and they must declare all overseas income and gains. This is a significant change compared to the current remittance basis system. 

The government has modified the overseas workday relief rules to align with the 4-year FIG regime. However, there are restrictions on the amount of income that may qualify. Namely £300,000 or 30% of the individual’s overall earnings. 

The 4-year FIG rules will also apply to trusts however the rules in this area are complex and intricate. The FIG regime will include foreign deemed income and gains linked to the beneficiary of distributions. 

The rules will also apply to life interests in UK trusts if they are chargeable as they arise. If assets aren’t covered by the 4-year FIG regime or the claim isn’t made in time, the Temporary Repatriation Facility (TRF) may offer a lower tax rate. 

The government will introduce several transitional measures to minimise the impact of the 4-year FIG rules. These include: 

• Current non-doms can re-base capital assets to their value on 5 April 2017 for disposals made after 6 April 2035. This benefit is limited to individuals who have claimed non-dom status since 5 April 2017 and are not deemed or actually domiciled. 
• The TRF will allow non-doms to bring personal foreign income and gains arising before 6 April 2025 to the UK at 12% between 6 April 2025 and 5 April 2027 and at 15% between 6 April 2027 and 5 April 2028. 
• The TRF will also apply to settlers and recipients of offshore trusts from 6 April 2025 to 5 April 2028. 

Until 5 April 2028, non-doms will be able to claim Business Investment Relief (BIR) for investments. FIG invested using the BIR regime will be eligible for the reduced rates under the TRF. 

An interesting effect of this regime is particularly seen in immigration law. The new rules clearly aim to encourage people to invest in the UK during their first 4 years of residence. 

There is a mismatch between the 4-year period and the 5 years that non-British nationals need for Indefinite Leave to Remain (ILR). 

Many immigration solicitors think this mismatch is intentional. Making individuals pay UK tax on global assets for 12 months to show commitment before applying for ILR. 

At current, there is no visa that allows someone to take advantage of the FIG rules. The government closed the investor visa route in February 2022. So far there has been no replacement visa route. 

Instead, high-net-worth individuals are currently entering the UK on skilled worker visas. Family investment companies, family offices, or UK branches of companies they own or run employ these individuals. 

Other Changes

The key further changes of which all need to be conscious are:

• The government will now charge VAT at a rate of 20% on tuition for private schools.
• Interest charged by HMRC for unpaid tax liabilities will increase by a further 1.5% from 6 April 2025.
• From 1 November 2024, the Energy Profits Levy will rise to 38%, and the 29% investment allowance will end. In addition, the government have reduced the de-carbonisation allowance rate from 80% to 66% starting on the same date.

It is still unclear if the economic challenges and pressures will result in new benefits and improved public services. Many hope this will be the case under a Labour government. But the proof will be in the pudding.

Having had the time to digest and reflect on this budget, one thing is for certain, change will not come overnight and as a society we must be prepare wherever possible.