Autumn Budget Statement 2024

The Chancellor of the Exchequer Rachel Reeves delivered her first Budget statement on 30th October 2024, and it was badged as a Budget to fix the foundations of the UK economy.

The Budget was one of increased taxation, borrowing and spending.  The increase in annual spending is projected at £70 billion, with approximately two-thirds of this figure on current spending and the balance on capital spending.  Approximately half of this additional £70 billion is expected to be met by the tax increases, and the remainder via borrowing.

There was an expectation that the tax changes would be wide-ranging, and in that respect, it was perhaps the busiest Budget in recent memory.  The tax burden, as expected, will be met by the wealthiest in society, albeit the changes to the national insurance rates and thresholds will impact everybody’s pay packet, and businesses in particular will suffer as a result of the increased rate of employer national insurance charges.

The big issue may be that the tax measures may lead to a larger exodus of those who Keir Starmer described as having “the broadest shoulders”.  This is 2024, after all, not 1974, and those wealthy individuals and entrepreneurial types who contribute the largest proportion of tax revenues to the Exchequer are mobile, they can shift their tax residence and their business interests in quick time.

The Tax Measures

In terms of the key announcements on taxation, the headlines are below:

Individuals

• Income Tax:
  • income tax rates – there are no changes to the income tax rates and bandings;
  • personal allowances – a commitment to not extending the current freeze of personal allowances, which are set to track inflation from the tax year 2028/29 onwards;    
• National Insurance (‘NIC’) - in addition to the increase in the NIC rate suffered by employers, from 13.8% to 15%, a reduction in the secondary threshold for employees, the level at which employees begin to incur NIC, from £9,100 to £5,000;
• Capital Gains Tax (‘CGT’):
  • CGT rate increases from the current 10% lower and 20% higher rates to 18% and 24% respectively, taking immediate effect from Budget day, as was rumoured in certain quarters;
  • the applicable rates on disposals of residential property remain unchanged at 18% and 24%; 
  • the rates that apply to Business Asset Disposal Relief (‘BADR’) and Investors’ Relief (‘IR’) will increase from 10% to 14% for disposals made in the 2025/26 tax year, and 18% with effect from 6th April 2026;
  • the lifetime allowance for BADR remains unchanged at £1m, whereas the allowance for IR has reduced from £10m to £1m with effect from 30th October 2024; 
  • for the carried interests of fund managers:
    • with effect from 6th April 2025, an increase in the rates of CGT applicable to their carried-interests from the existing rates of 18% and 28% to a flat 32% rate; and
    • with effect from 6th April 2026, these gains will be brought into the income tax code, and subject to both income tax and Class 4 national insurance contributions;
• alternative finance tax rules will be amended to ensure that the tax consequences of alternative and conventional financing arrangements are placed on a level playing field.  The legislation will provide that, where a person wishes to use alternative finance to raise capital using an asset that they already own, CGT will not arise;
• Inheritance Tax:
  • the existing freeze on both the inheritance tax threshold of £325,000 per person and the additional tax-free threshold of £175,000 for qualifying residences that pass to direct descendants will be extended to apply for the tax years 2028/29 and 2029/30; 
  • with effect from 6th April 2027, most unused pension funds and death benefits held in non-discretionary schemes will be included within the estate of the deceased member, regardless of whether the scheme is UK registered or a Qualifying Non-UK Pension Scheme;
  • restrictions in Business Property Relief (‘BPR’) and Agricultural Property Relief (‘APR’), which historically have provided exemption from inheritance tax providing certain conditions are met, from 6th April 2026, with:
    • the current relief of 100% applying only to the first £1m in value (APR and BPR combined limit) within the estate, and
    • the exemption on the amount above the first £1m reduced from 100% to 50%; and 
• similarly, for shares listed on alternative markets, such as AIM, the current 100% relief will be reduced to 50%.    

Reforms to the existing regime applicable to non-UK domiciled individuals are a particularly significant matter, and a summary of the changes that will impact both non-UK domiciled individuals and any trusts they have settled are included within a dedicated section towards the end of this briefing.

Businesses

• the Corporate Tax Roadmap has been published, setting out the plan for corporation tax for the duration of this parliament, viz:
  • the corporation tax rate is capped at 25% for duration;
  • the small profits rate and marginal relief are also maintained current rates and thresholds;
  • R&D Tax Reliefs and Patent Box will be maintained at current levels;
  • the Capital Allowances regime remains at current rates and reliefs, specifically including the £1m annual investment allowance and full expensing;
  • OECD Pillar 1 & Pillar 2 – adopting the undertaxed profits rule for Pillar 2, and changes to be implemented in line with the internationally agreed updates to the rules;
  • within the Roadmap, there are consultations in a number of key areas, namely:
    • simplifying Capital Allowances legislation;
    • extending full expensing to assets acquired for lease or hire;
    • Relief via Capital Allowances for predevelopment costs;
    • reforms to Transfer Pricing, including lowering the exemption threshold and potentially removing the requirement for Transfer Pricing on transactions between UK parties;
    • reforms to the Permanent Establishment rules;
    • reforms to the Diverted Profits Tax;
• measures to prevent the avoidance of tax charges on loans to participators, where taxpayers are currently exploiting the anti-avoidance rules; and 
• plans to modernise HMRC systems, with updates next Spring.

Indirect Taxes

• Stamp Duty Land Tax (‘SDLT’) on Residential Property:
  • an increase from 3% to 5% in the additional SDLT charge for individuals purchasing additional properties, such as second homes or buy-to-let properties, with effect from 31st October 2024; 
  • the single rate of SDLT payable by certain companies and other non-natural persons purchasing dwellings for consideration in excess of £500,000 increases from 15% to 17%;
  • a reduction in the nil rate band from £250,000 to £125,000;
  • a 2% charge on consideration between £125,000 and £250,000; and
  • a reduction in the maximum purchase price under which first time buyer’s relief can apply, from £625,000 to £500,000;
• Value Added Tax (‘VAT’): the pre-announced scrapping of the Value Added Tax (‘VAT’) exemption for private schools, meaning that private education and boarding fees will be subject to VAT for terms starting on or after 1 January 2025;
• Other Indirect Taxes:
  • a 50% increase in Air Passenger Duty (‘APD’) for private jets, and an average £2 increase in APD for commercial short haul flights;
  • a 1.7% reduction in Alcohol Duty on draught alcohol, saving an average 1p a pint; and
  • a freeze in fuel duty and a one-year extension to the current temporary 5p reduction;

Overall, the headline announcement was the change to private schools’ VAT status, which has been widely covered in recent months; the increases to SDLT and APD for private jets are similarly targeted at higher earners.  Meanwhile, the continued freeze to fuel duty will be welcome to many of those the Government describe as “working people”.

The forecast VAT gap for 2023/24 of £9.5 billion (5.3%) shows an increase in percentage terms compared with the estimate for 2022/23 of £8.1 billion (4.9%), published in ‘Measuring Tax Gaps 2024 Edition’.  This VAT gap, when coupled with HMRC’s recent announcement that they are recruiting 5,000 new compliance officers, suggests that there may be testing times ahead for those within the scope of VAT.  

International Matters

• the reforms for non-UK domiciliaries were the most significant changes on the international front, at least insofar as they impact non-UK resident settlements that have been created to confer the special tax advantages that accrue to so-called Protected Trusts (see below);
• the adoption of OECD Pillar 1 & Pillar 2, as previously noted;
• a more coordinated approach to tackling offshore tax non-compliance under the OECD’s Common Reporting Standard, given the challenges posed by technology in the area of digital platforms and crypto-assets; and
• a focus on ‘offshore’ matters, with a reform of UK anti-avoidance rules directed at non-UK structures – the government has published a call for evidence on how these rules could be reformed, but any resulting changes are not expected to come into effect before 6th April 2026. 

The Regime for Non-UK Domiciliaries

We already knew that a major overhaul was on its way for non-UK domiciliaries, based upon the Labour Party’s updated policy paper on 8th August 2024, which largely adopted the Tory government’s proposed reforms announced in the Spring Budget earlier this year.  

With effect from 6th April 2025, the existing regime for non-UK domiciliaries will effectively be abolished and replaced by a new residence-based regime.  The key elements of the changes comprise:

• Four-Year Income and Gains (‘FIG’) provisions to replace the existing remittance basis of taxation for individuals, which will:
  • allow foreign source income and capital gains to be remitted to the UK free of taxation in the first four years of UK tax residence, providing the individual has not been UK tax resident at any point within the 10 years preceding their arrival in the UK, but
  • significantly curtail the tax benefits currently offered to non-UK domiciliaries, who can avail of the remittance basis of taxation for 15 tax years after their arrival in the UK under the deemed domicile rule;
• a Temporary Repatriation Facility (‘TRF’) for those who have previously been taxable under the remittance basis of taxation, which has been extended from what was initial proposed, viz.:
  • individuals who have previously claimed the remittance basis and have untaxed FIG will be able to make an election to designate amounts for a period of three tax years from 6th April 2025;
  • these designated amounts will be chargeable to tax at a rate of 12% in the tax years 2025/26 and 2026/27, increasing to 15% in 2027/28;
  • the scope of the TRF has been extended to non-UK resident trusts, as noted below; and
  • the tax charges will arise in the year of designation, although the FIG amounts in question can be remitted at any time;  
• a new residence-based test for non-UK domiciliaries in relation to their exposures to inheritance tax on foreign situated assets.  The test for whether these assets are within the scope of inheritance tax is their residence position, viz.:
  • if has or she has been resident in the UK for at least 10 out of the last 20 tax years that immediately precede the tax year in which an event arises, namely on lifetime gifts or on death, then the assets will be within scope; and
  • the period of time that the individual remains within scope after their departure from the UK (which for a UK resident of 20 years or more would be 10 years under the test above) will be shortened if they have only been UK tax resident between years 10 and 19 under the test above;
• qualifying individuals, as defined, can elect to rebase certain foreign assets to their market value at 5th April 2017 for CGT purposes;
• in relation to trusts settled by non-UK domiciliaries:
  • the benefits of the current trust protections for settlors who continue to be non-UK domiciled will be removed, subject to whether or not they qualify for FIG relief in their own right;
  • the TRF be will available for settlors of non-UK resident trusts who are former remittance basis users under the same timelines and at the same tax rates as noted above, by reference to income and capital gains that have arisen up to 5th April 2025 only;
  • the exemptions from inheritance tax that, under current law, apply to foreign assets held by trustees (the excluded property rules) long after the settlor has become UK domiciled and/or deemed domiciled, will no longer apply, and the exposure of the trustees will be based upon the settlor’s own inheritance tax position, i.e. if the settlor is a long-term resident under the 10-year rule, then the trustees will be fully exposed on the assets they hold;
  • finally, an unfortunate consequence of these new provisions is that in certain cases, where a settlor decides to leave the UK and at a later stage ceases to be a long-term UK resident under this 10-year rule, there will be an exit charge for the trustees in relation to assets that were previously excluded property, but have become relevant property; and
• there are certain transitional provisions that apply, which may impact the application of these new rules and should be considered. 

These changes will have a significant impact upon more wealthy non-UK domiciled individuals, those UK resident individuals who are currently benefitting, or who have previously benefitted from the remittance basis of taxation, and who have settled valuable trusts offshore.  If they have not considered their position already, then time is running short and they should consider their position as soon as possible. 

Overall, this is not good news, although perhaps the facility to remit foreign income and the proceeds of capital gains at preferential tax rates, for both personal and trust assets, might soften the blow a little.

Final Thoughts

The wide-ranging changes announced within the Budget were fully expected, with the additional tax burden to be met principally by those with the broadest shoulders.  But it seems clear that those at the lower end will feel the pinch as a result of the continued freeze on personal allowances and the reduction in the secondary NIC threshold, augmenting the cumulative impact of inflation that they have suffered since 2021.

The changes across the board, in terms of both direct and indirect taxes, will cause some UK resident individuals and businesses to reassess their position, and potentially lead to a further exodus from the UK once the impact of these changes fully sink in, as has been our recent experience in the Isle of Man with a significant uptick in enquiries over the last few months.  

It remains to be seen whether the changes will cause further inflationary pressures as a result of additional government spending, but a contractionary impact on the economy in the short to medium term would be no surprise, given the fiscal tightening and added burdens that have been placed upon individuals and businesses alike.

Equiom Tax Services Limited offers both global insight and local knowledge to advise individuals and businesses facing a diverse range of international tax challenges. Get in touch with Andrew Cardwell if you have any questions regarding any of the above topics, or to discuss how Equiom can support you.

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