Key takeaways
Inheritance tax reliefs significantly reduced
Thresholds frozen; business and pension assets impacted.
Employers face rising costs and obligations
NIC increase and new rights raise compliance burden.
CGT and carried interest reforms tighten rules
Private equity gains taxed more like income.
Following the new Labour government’s announcement of their first budget, we have collated a summary of the main points of contention that will affect most of our clients.
1. Inheritance tax.. several points to note…
Threshold freeze to 2030;
Inherited pension to become taxable from April 2027;
Reducing business and agriculture reliefs for assets worth over £1m to 50% - effective IHT rate 20%; and
A reduction in all circumstances of the rate of relief from 100% to 50% for AIM shares.
2. For employers/business owners
An increase of 1.2% in employers’ national insurance contributions together with a reduction in the level at which the national insurance tax starts, coupled with changes to employees’ rights, championed by the Employment Rights Bill, will mean higher costs to employers / business owners.
3. Capital gains tax (CGT) rates
A 20% increase in main CGT rate from the current rate of 20% to 24%, with the lower rate increasing from 10% to 18%. The rate increases apply to assets other than UK residential property, which will remain at 24%.
4. Private Equity earnings (carried interest)
The rate of CGT applicable to carried interest will increase to 32% from April next year and, as of April 2026, the Government intends to bring the carried interest regime wholly within the scope of income tax as opposed to CGT, subjecting it also to Class 4 NICs. This will however be subject to a 72.5% “multiplier”, so the tax base will be somewhat reduced. When this multiplier is applied to the currently applicable top rate of income tax (45%) this produces a reduced rate of tax of approximately 32.5% (being very similar to the 32% rate of CGT that will apply to carried interest from April 2025, before the new income tax-based regime kicks in one year later). A consultation is being launched into the appropriate conditions for such “qualifying” carried interest, which would benefit from this reduced rate of income tax, such as a minimum co-investment requirement and a minimum holding period.
5. VAT on private schools
Imposing VAT on private school fees is only likely to further increase the flow of people choosing to move out of the UK, with UK private education institutions set to suffer from a loss of fees from students as some look to relocate to comparatively cheaper US and European schools.
6. Non-Domicile Individuals - non-dom new rules
As suggested by Labour’s manifesto, the abolishment of the non-dom regime will proceed on 6 April 2025.
This has now gone further with the removal of the 50% discount on foreign income in 2025-26 and applying inheritance tax on excluded property trusts.
However, there will be an extension to the Temporary Repatriation Facility (TRF) from two to three years. This means that, individuals who claimed non-dom status before April 2025, will be able to remit at a reduced rate foreign income and gains that arose prior to April 2025. The TRF will be available for a limited period of 3 tax years, from 2025/6 to 2027/8. The rate will be 12% for the first 2 years and 15% in the final tax year of operation.
7. Corporate tax roadmap
In an attempt to promote a sense of stability within the corporate tax regime, the Government has produced a “Corporate Tax Roadmap”, a document setting out certain commitments as to areas of tax law that the Government confirms it will leave unchanged change during the lifetime of this Parliament. This includes a commitment not to increase the rate of corporation tax above its current 25% level during this time. The document also makes a commitment to preserve certain other key pillars of the UK’s corporate tax regime, including maintaining the key features of the capital allowances regime, and continuing to ensure a competitive system of Research and Development reliefs.
8. Stamp duty/stamp duty reserve tax
The Government emphasised its continued commitment to delivering the Private Intermittent Securities and Capital Exchange System (PISCES) – a market for trading private company shares – and announced that PISCES transactions will be exempt from stamp duty and SDRT.
