Inheritance Tax

Nil-Rate Bands

The Chancellor has frozen the Inheritance Tax (IHT) Nil Rate Band threshold of £325,000 for a further two years from the initial date of 2028 to 2030. Thus, the first £325,000 of any estate, and £500,00 of an estate consisting of a residential home being inherited by a direct descendant will continue to be tax-free. The rest of an estate will continue to be taxed at 40%.

Residence-based System

Currently IHT is only applicable to worldwide estates when the deceased was domiciled in the UK or deemed domiciled by being resident in the UK for a minimum of 15 years out of the previous 20.

This has been amended to a residence test so that individuals who have been UK resident for 10 of the preceding 20 tax years will become subject to IHT on their worldwide assets. Consequently, even the estates of those who have become non-UK resident could remain subject to the IHT for 10 years after moving out of the UK.

Business Property Relief and Agricultural Relief

Business Property Relief allows eligible businesses to pass on assets tax-free, and Agricultural Relief allows farmers to pass on agricultural assets tax-free.

Both reliefs will be reformed from April 2026. The first £1 million of combined business and agricultural assets will be tax-free on inheritance. However, for combined business and agricultural assets of over £1 million, IHT will apply on 50% of the asset value, which will result in an effective rate of 20%.

AIM-listed shares will not be included in this £1 million limit. Where AIM shares have previously qualified for BPR, because they are trading companies rather than investment companies, they will now receive only 50% IHT relief, and subject to an effective rate of 20%.

Purchasing farms as a means of sheltering assets from IHT liability has become increasingly popular.  This APR reform is likely to deter high net worth individuals from doing so. The Chancellor stated that the £1 million relief would assist in protecting small farms. However, currently £1million would roughly equate to 50 acres of land, so it is to be expected that practically all farms, even the small ones, will be subject to IHT on their owner’s death so presenting a substantial threat to the rural community.

Business and agricultural assets have not always enjoyed full exemption from IHT. When they were chargeable in previous years, there was an interest-free instalment facility.  Should this be re-introduced, this would relieve pressure on IHT payments.

Pensions

The Chancellor has confirmed that inherited pensions will form part of an estate for inheritance tax purposes, but not until April 2027. Until now they have not formed part of an estate and generally have not been subject to tax because the undrawn funds are held in a discretionary trust over which the pension holder has no absolute authority.

As a result high net worth individuals have utilised pensions as a tool for inheritance tax planning, often by maximising their contributions simply by living off assets they hold absolutely and which are therefore chargeable.

This amendment will affect people of more modest means and will also cause a large rise in the number of estates subject to IHT from 2027. A difficulty with pensions is that an individual is unable to pass them on during their lifetime, unlike with other assets.

The delay in implementation is likely largely due to the difficulties in reconciling the charge, with the technicalities of ownership through discretionary trusts and the inheritance tax charge. In addition, the delay in implementation gives pension scheme administrators time to prepare for these changes which place responsibility on them for payment of the tax.

It was thought that the facility to draw down up to 25% of a pension pot without any tax liability might be affected by the Budget but this seems to survive, at least for the time being.

Capital Gains Tax

Increased CGT Rates

The government has increased the Capital Gains Tax (CGT) rates. The lower rate of CGT, broadly paid by basic rate income tax payers has been raised from 10% to 18%, while the higher rate has moved from 20% to 24%. This change applies to disposals made after 30 October 2024, only the second time the rate of CGT has been increased in the middle of a tax year (the other being George Osborne, the then Chancellor, in 2010).

The rate of CGT applying to additional residences was already at these levels, so there is no longer a premium rate for this asset class.

Stamp Duty Land Tax

Stamp Duty Land Tax (SDLT) was another focal point of the Autumn Budget, with new measures designed to support first-time buyers and those purchasing primary residences, while ensuring that additional homebuyers and property investors contribute more.

Higher Rates for Additional Dwellings

From 31 October 2024, the surcharge on SDLT for second homes and additional properties will rise from 3% to 5%. This policy is aimed at providing a competitive edge to those purchasing primary residences, including first-time buyers, by reducing the competition from landlords, property investors, and second-home buyers.

The government projects that the increase in the Higher Rates for Additional Dwellings will contribute to an additional 130,000 transactions over the next five years by buyers acquiring their primary homes. The surcharge is applicable even if a buyer’s existing residential property is situated outside the UK. In addition, buyers who are non-UK resident incur a further 2% SDLT penalty is applied, bringing the top SDLT rate as high as 19%.

This series provides a summary and commentary on the 2024 Autumn Budget. For detailed advice and assistance navigating the impacts of the new budget please contact Michael Woodward at MichaelWoodward@cartercamerons.com.