Budget 2024: what you need to know

The long-awaited Budget, the first ever by a female Chancellor and the first by a Labour government in 14 years, has finally been delivered.

From a personal tax perspective, it is not likely to be remembered for the headlines it generated, but more for its impact on the structure of UK taxation. The changes include a measure which is arguably the biggest in personal taxation for over 200 years.

In this note, we summarise the key changes for individuals and consider the impact these changes will have, including their influence on the behaviour of taxpayers.

Rothschild & Co does not provide tax advice and you should always discuss your position with a tax adviser before taking any action or making decisions.

Income tax and national insurance

In line with the party’s manifesto promise, Labour did not make any changes to income tax rates. The income tax rates for the 2025/26 tax year will remain as follows:

• Basic rate – 20%
• Higher rate – 40%
• Additional rate – 45%

While the rate at which employees pay national insurance has remained stable, in a hotly debated change, employers’ national insurance contributions will rise by 1.2 percentage points from 13.8% to 15% from 6 April 2025 and the level at which it will start to apply will fall to just £5,000 for most employers.

Capital gains tax

A change in the rates of capital gains tax (CGT) was widely expected and was duly delivered, but the increase was not as draconian as some feared.

The standard rate of CGT was increased to 18% and the higher rate to 24%. Interestingly, the rate of CGT on residential properties (if not a primary residence), which was already at 24%, did not rise.

These changes took immediate effect. While changing tax rates in this way is rare (and adds complexity) it is not unique. For instance, Chancellor George Osborne increased rates in June 2010 from 18% to 28%.

In recent years it has become common for some taxpayers to seek to ‘lock’ into a tax rate ahead of a potential change, without actually triggering a tax charge until later. In effect, trying to have their tax cake, but delaying the eating of it. In her Budget, the Chancellor announced ‘forestalling’ measures designed to foil those who had undertaken such planning ahead of Budget day. Such forestalling provisions are becoming an increasingly common part of Budgets and one must assume that this trend will grow. The days of pre-emptive tax planning may now be in the past.

Ever since its introduction in 1965, Chancellors have tried to favour CGT reliefs for entrepreneurs. Reeves was no exception.

Business asset disposal relief (BADR) reduces the CGT rate on certain business assets, including shares in unquoted trading companies. From 6 April 2025 the rate of tax where BADR applies is to be increased from 10% to 14%. There will be a further increase in the BADR rate from 6 April 2026, to 18%. The ceiling of £1 million on BADR remains.

Investors’ relief seems to be seldom used in practice, but its rates are to be increased by the same amounts and over the same time periods. However, the lifetime cap for investors’ relief fell with effect from Budget day to £1 million.

Carried interest has its own tax rate, which we discuss below.

Inheritance tax

Despite fears to the contrary, the Chancellor did not unpick the potential exempt transfer (PET) regime, so it still remains possible for an individual to make gifts free of inheritance tax (IHT) provided they survive the gift by at least seven years. While the Chancellor froze the ‘nil-rate band’ for IHT at £325,000 until 2030, this was only following tradition as this has been the figure since 2009.

However, as explained below, the Chancellor did make very significant changes to the structure of IHT and her changes are likely, in time, to impact how individuals undertake succession planning and pass wealth down the generations. There were three such changes and together they will have a dramatic impact.

1) Changes to reliefs

The first change related to the reliefs for agricultural property (APR) and certain business assets under business relief, commonly called business property relief (BPR). At present, APR and BPR can exempt many assets, such as qualifying farms or shares in trading companies, from IHT. This is to change with effect from 6 April 2026. From that time, the 100% rate of relief will continue for the first £1 million of combined agricultural and business property.

Beyond this £1 million ceiling, the relief for APR and BPR will be a maximum of 50% meaning that the IHT rate on such assets will normally be 20%.

The press release issued on Budget day gives the following example: “an interest of £2 million in shares in an unquoted company would attract 100% relief on the first £1 million and 50% relief on the second £1 million. This means a potential IHT liability of £200,000 and an effective IHT rate of 10% before the application of any other exemptions and the nil-rate band”.

The Chancellor said that her changes mean that “almost 75% of estates claiming APR and the majority of estates claiming BPR in 2026/2027 are expected to be unaffected by these reforms”. The Government is to publish a technical consultation on the measures in early 2025. This document will consider the position of trusts, but it is envisaged that there will be a combined £1 million allowance for trustees.

The changes are likely to have a significant impact on some trusts. Many trusts have been created to hold shares in unquoted trading companies for children or grandchildren. While trusts normally face an IHT charge every 10 years, normally the tax rate would be zero because the trusts assets would qualify for BPR. Henceforth, trustees will need to consider how to fund the IHT charge once the rate of BPR has fallen to 50%.

In another change, the Chancellor announced that, from 6 April 2026, the rate of BPR on qualifying AIM shares will fall from 100% to 50%. It is still unclear whether these will benefit from the £1 million allowance.

As these new restrictions do not come into operation until April 2026, some taxpayers may seek to make gifts under the present regime with the possibility of a complete exemption from IHT. However, consistent with the modern approach of Chancellors anticipating steps to reduce the impact of their changes (see above), the Budget day press release warned of preventative measures to prevent forestalling.

The press release gives the following example: “a lifetime gift of unquoted shares of £2 million made on or after 30 October 2024 will be a failed PET if the donor dies within seven years. 100% relief would apply to the first £1 million and 50% to the next million under the new rules if the recipient owned the shares until the donor’s death and the donor’s death is on or after 6 April 2026”.

Those wishing to undertake planning ahead of April 2026 should therefore consult with their tax adviser.

Despite the Chancellor’s view that these changes will only impact a minority of estates, many individuals will have based their estate planning around APR and BPR. Such individuals will have to review their wills (as assets which could previously pass to non-spouse heirs free of IHT will no longer be able to do so), their family trusts (should these be readjusted before the APR/BPR changes) or their longer-term plans (on which see below). The interplay between CGT free uplift on death (which has been retained, for now), and BPR may also need to be considered in some cases.

2) Pension tax changes

The second IHT change relates to the treatment of pensions. Typically individuals have refrained from drawing on pension pots on the basis that, as they were free from IHT, this could be a ‘nest egg’ for their children and grandchildren.

From 6 April 2027, residual funds held within a pension scheme (including self-invested personal pensions) will, on the death of the contributor to the pension, be within the charge of IHT.

This change will be subject to a consultation process which expires on 22 January next year.

3) The structure of IHT

The third major change relates to the very structure of IHT and the basis on which liability to the tax is determined. Assets situated in the UK, such as UK real estate, are always subject to IHT, regardless of who owns them. However, until now, IHT liability on overseas assets was determined by domicile.

From 6 April 2025 this will change and a liability to IHT will be judged not by the question “are you domiciled in the UK”, but rather “are you resident in the UK?”. The legislation will contain detailed rules for determining whether an individual is to be regarded as resident for IHT purposes.

This change is primarily designed to combat the ability of so called ‘non-doms’ to escape IHT, but this fundamental structural change will also govern the liability of IHT for those born and bred in the UK and who have never lived abroad.

For example, if an individual who was born in the UK decided to retire abroad to minimise IHT under the ‘old’ law (based on domicile) they would have had to convince HMRC that they had left the UK for good, never permanently to return. It would often be difficult to persuade HMRC that this was the case. Under the proposed new regime, if the individual has been or becomes non-UK resident for at least 10 years, they will cease to be subject to IHT on their non-UK assets.

Taken together these changes will have a profound impact on the form and timing of estate planning and individuals will wish to review their position with their tax advisers. As certain assets lose all or part of their tax efficiency, such as pensions and unquoted shares in trading companies, individuals may look to other ways of moving assets or wealth to family members to improve their IHT position, including life assurance and the creation of growth shares in family companies.

Changes to the non-dom regime

The most significant structural change relates to the taxation of non-doms and these changes are considered in our separate note: How the ‘non-doms’ changes could affect you.

Carried interest

The CGT rate on carried interest will rise from 28% to 32% with effect from 6 April 2025. Again, however, it is not the headline change which is of the most significance. The Chancellor says that she will consult on further changes (to be introduced from April 2026) and that she will bring carried interest within the scope of income tax. The effective tax rate is expected to rise to around 34% as a consequence of these additional changes.

VAT on private school fees

The Chancellor confirmed the introduction of VAT on private school fees from January 2025. This change will again be underpinned by forestalling measures.

Stamp duty land tax

The higher rate for ‘additional resident purchases’ by individuals and purchase of residential properties by companies will increase from 3% to 5% above the standard rates applicable to the property.

Conclusion

The full impact of this Budget will not be felt for some time and not just because many of the changes do not become operative until April 2025 or April 2026. Nonetheless we encourage clients to have early conversations with tax advisers where appropriate.

^{Past performance is not a guide to future performance and nothing in this blog constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.}