The upcoming Autumn Budget may introduce substantial changes to Inheritance Tax (‘IHT’), Stamp Duty Land Tax (‘SDLT’) and Capital Gains Tax (‘CGT’) in the UK. Here are some of the ways how:

INHERITANCE TAX

Residence Nil Rate Band

In addition to the current Nil Rate Band of £325,000, the Residence Nil Rate Band entitles homeowners to a further £175,000 tax-free when leaving their home to direct descendants. Potential adjustments to the Residence Nil Rate Band could include abolishing or lowering the threshold. If the Residence Nil Rate Band is abolished, the combined threshold for married couples would decrease from £1 million to £650,000.

Spousal Exemption

Assets transferred to a spouse or a civil partner are currently exempt from IHT. This means both partners can pass on their entire estate tax-free, including the transfer of the Nil Rate Band and Residence Nil Rate Band if not utilised on the first death. Although unlikely, the Budget may consider revising such reliefs.

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. However, the government is reportedly considering capping both types of relief. This would increase the liability on family-owned businesses and farms.

Pensions

Defined contribution pensions can generally be passed on without being subject to IHT, although the government is considering tightening these conditions. This may be by freezing the exemption or restricting the types of pensions that would qualify. This amendment will impact estate planning where an individual has a significant pension.

STAMP DUTY LAND TAX

Currently, the nil-rate threshold is set to drop from £250,000 to £150,000 in 2025, which could increase costs for buyers significantly. Reducing this threshold has already been criticised for hindering access to the housing market, especially for those entering it for the first time.

If the government decides to freeze the thresholds or implement temporary relief measures, it could encourage more transactions. Research indicates that every £1,000 increase in stamp duty could result in up to 13,000 fewer property transactions annually.

Additionally, there is speculation that the Chancellor may raise the supplemental 3% stamp duty for those who purchase a second home without replacing their main residence. Increasing the stamp duty surcharge for non-UK residents is also on the table, highlighting areas of concern for foreign investors and second-home buyers alike. These changes could influence foreign investment decisions and impact buyers with multiple properties, a critical point for clients managing diverse property portfolios.

Additionally, the budget may introduce specific stamp duty relief initiatives aimed at stimulating the housing market. Proposals are emerging for targeted relief for first-time buyers and those purchasing energy-efficient homes. Keeping the existing thresholds for first-time buyers would not only support them but also enhance market activity.

Encouraging developments of sustainable homes could be beneficial in the long term, potentially easing the supply crisis. Currently, the rental market is under significant strain, with rental properties 20% below pre-pandemic levels and average rents up by 40%.

CAPITAL GAINS TAX

Capital Gains Tax Updates

Capital gains tax changes may be on the horizon, with reports suggesting a potential increase to align it closer to income tax rates. In 2022, it was estimated that an increase could lead to 790,000 property sales and 120,000 fewer purchases. This would likely result in an oversupply, placing downward pressure on prices. The tax hike might compel landlords to rethink their investment strategies, leading to a longer hold on properties and a possible shift from individual landlords to larger corporations.

It’s also important to note that the property market has already faced several tax hikes over recent years, including the phasing out of mortgage interest relief on buy-to-let (BTL) properties and the 3% stamp duty supplement on second homes. These measures have already impacted landlord profitability, so further CGT increases may lead to even greater reconsideration of current investment strategies.