Businesses and business owners were expected to take the brunt of the Chancellor's announcements in the 2024 Autumn Budget, with changes to employment laws, national minimum wage, and employers’ national insurance contributions (NIC) rises.
The overall sentiment from the Budget is mixed. Some areas were as expected and some a little better than had been feared. But a Budget raising £40bn in taxes does not come easy, and businesses are taking on the lion’s share of the burden with changes in employment laws, national minimum wage, and significant increases to employers’ national insurance contributions (NIC). The combination of all of these measures, and their scale, will be concerning the business community.
Business owners were actively courted over the past year, culminating in a Labour manifesto stating that “government is at its best when working in partnership with businesses”, that it would “support business through a stable policy environment”, and “give investors the certainty they need to fuel growth.” With that in mind our pro-growth budget wish list included ‘medium predictability to enable decision making’. As we got nearer to Budget day, however, there was only more uncertainty for businesses and the result was the biggest tax-raising event for over 30 years, the majority of which is borne by businesses and business owners.
High up our wish list for a pro-growth agenda was for tax policy to recognise and reward entrepreneurship. Instead, Business Asset Disposal Relief (BADR) will increase from 10% to 18% by April 2026. It is estimated this will generate £500m and, given the importance of the SME market in the UK, this might be seen as a blunt and potentially ineffective measure. While it is heartening that entrepreneurs will continue to benefit from the lowest rate of CGT on selling their businesses, we are concerned that this increased rate will discourage the risk-taking and entrepreneurship that our country so desperately needs to fuel innovation and growth.
The news is better for property business owners, with the CGT rate for disposals of second homes maintained at 24%. It is odd, however, to have such a small difference in the rate of CGT a landlord pays on the sale of a property and that applying to the disposal of a business, which an individual has worked for years to build and employs people. Public policy has for a long time sought to weight tax incentives in favour of those invested in active businesses rather than those involved in passive investment. It is not clear that the changes announced at the Budget align with the principle that taking a risk in growing a trading business should be encouraged.
The shock announcement for business owners was the capping of both Business Property Relief (BPR) and Agricultural Property Relief (APR). Our pro-growth wish was for BPR and APR to be retained in their current form and for wealth creation and wealth deployment to be celebrated and encouraged.
Small and medium sized entities (SMEs) account for over 60% of employment and over half of turnover in the UK. They are vital for existing jobs as well as driving further job creation, innovation, and economic growth in the UK. Ensuring certainty in business succession through measures such as BPR is crucial for maintaining an environment conducive to the preservation and future growth of SMEs. Businesses plan for many variables and risks, but the trickiest and most painful one is the death of the owner manager. On top of the personal loss for the family, the last thing that employees, suppliers, and the local community want is for that business to be sold in order to pay inheritance tax.
The ability to pass on a trading business to the next generation, without disturbing its long-term value, is key to stability for the business, its employees, customers, and suppliers. Indeed, it was another Labour Government that recognised this by introducing BPR in 1976, and its purpose remains the same nearly 50 years later.
Similarly, agricultural businesses often find themselves exposed to the political and commercial climate, as well as the environmental one. Since Brexit, farming in the UK has become even more precarious with the withdrawal of European subsidies, while climate change, food security, the provenance of what goes into the food chain and stewardship of the natural environment have all grown in strategic importance. APR, which was introduced four decades ago to protect the agricultural value of land from IHT on death, fosters the stable stewardship of agricultural land and has only become more relevant and important for the country.
There has been precious little public debate about restrictions to BPR and APR. These proposals present difficult decisions for family-owned businesses and farms and the unintended consequences could be significant for the growth of the economy. Holding back capital, passing on the business to the next generation sooner than planned, or simply calling ‘time’ and selling-up will restrict jobs, discourage innovation, and diminish further investment in the business. These types of behavioural responses cannot possibly align with the policy objective, and we wonder why the Government did not test the water by releasing this policy earlier.
Fifty years to the day after Mohammad Ali fought George Foreman in the ‘Rumble in the Jungle’, Rachel Reeves seems on the whole to have adopted her own ‘rope-a-dope’ tactic: leaking plans in the press to draw out any negative reactions and refining the eventual policy announcements. While many commentators will note that the Budget was ‘not as painful as it could have been’, there were still a number of blows landed on entrepreneurs and family businesses. It will therefore come as some relief to hear the Chancellor signal this is “not a Budget we want to repeat”, although might there be further rounds to come – thrilla after April-a?
The Autumn Budget brought significant announcements in relation to inheritance tax (IHT) for landowners and business owners. While the existing nil-rate band and residential nil-rate band will remain unchanged, important reliefs for business property and agricultural property will be restricted from 6 April 2026. The inheritance of unused pension funds at death will also be brought within the scope of IHT.
IHT rate bands
IHT is a capital tax paid on the value of an estate on death and on certain chargeable lifetime gifts. The current rate of IHT is 40%.
An estate valued up to the nil-rate band (NRB) of £325,000 can be inherited without IHT. Any unused NRB of an individual can also be passed to their surviving spouse or civil partner. A further residential nil-rate band (RNRB) of up to £175,000 is available to reduce the value of an estate if a family home is left to direct descendants. Like the NRB, an amount of up to 100% of the unused RNRB can be passed on to a surviving spouse. A potential combined NRB and RNRB of up to £1m may therefore be available for a married couple whose joint estate is worth £2 million or less.
The Chancellor announced that the current NRB and RNRB will not change and has also frozen them at current thresholds for a further two years until 5 April 2030.
Business and agricultural property relief
Current rules allow relief from IHT for the value of trading business assets or agricultural land and property gifted during lifetime or held at the time of death. Broadly speaking, 100% business property relief (BPR) is available for a trading business, or an interest in a business, and unlisted shares in a trading company.
A 50% relief applies to some other forms of business assets, such as assets used by a trading business.
100% agricultural property relief (APR) is available for land or pasture used to grow crops or rear farm animals as well as associated property such as farmhouses and cottages. Relief can be restricted to 50% depending on the asset and tenancy arrangements.
Qualifying Alternative Investment Market (AIM) shares have historically qualified for 100% BPR, when held for more than 2 years.
Changes introduced
From 6 April 2026, the availability of BPR and APR at 100% will be limited to a total allowance of £1 million. The balance of qualifying assets will be eligible for relief at 50%. The rate of 50% applying to certain business and agricultural property will remain unchanged.
This new allowance will apply to the combined value of business property or agricultural property and will cover transfers during lifetime and the value of property in a death estate.
For example, the allowance could be divided across £750,000 of property qualifying for BPR and £250,000 of property qualifying for APR.
If the total value of the qualifying property to which 100% relief applies is more than £1 million, the allowance will be applied proportionately across the qualifying property. For example, if there was agricultural property of £6 million and business property of £4 million, the allowances for the agricultural property and the business property will be £600,000 and £400,000 respectively.
Assets automatically receiving 50% relief will not use up the allowance and any unused allowance will not be transferable between spouses and civil partners.
AIM shares will qualify for relief at 50%.
Anti-forestalling measures will be introduced in relation to lifetime transfers made on or after 30 October 2024 where the transferor passes away on or after 6 April 2026, meaning the £1 million limit could apply to those gifts.
The £1 million allowance also applies to trusts. Trustees of most trusts are liable to an IHT charge of up to 6% every ten years on the value of property held in a trust. There is also an exit charge when property leaves the trust. The £1 million allowance will apply to the combined value of property qualifying for BPR and APR within the trust, on each ten-year anniversary charge and exit charge. A consultation is expected in early 2025 covering the detailed application of these changes for property held in trust.
Settlors may have set up more than one trust comprising qualifying business or agricultural property before 30 October 2024, each trust would have a £1 million allowance for 100% relief from April 2026. The Government intends to introduce rules to ensure that the allowance is divided between these trusts where a settlor sets up multiple trusts on or after 30 October 2024.
Another update to IHT is that the Government will introduce legislation to extend the existing scope of APR from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK Government, devolved governments, public bodies, local authorities or approved responsible bodies.
Inherited pensions
Currently, the value of most pensions is outside the scope of IHT. From April 2027, the Government will bring unused pension funds and death benefits payable from a pension into an estate for IHT purposes.
While changes to BPR and APR were anticipated, the precise form of any changes was uncertain and did not feature in the Labour manifesto. Amid concerns that the relief could be removed entirely, it is welcome to see commitment to maintaining the relief in some form.
These changes will have a significant impact for the owners of private businesses and agricultural assets, as well as their families. Careful thought will now need to be given to how these businesses can be continued by the next generation, as well as how families will be able to meet the IHT liabilities they are now exposed to.
As an example, the estate of a qualifying trading business owner with unlisted shares valued at £11m would now have a potential exposure to IHT of £2m, potentially without other liquid assets to pay it. This could call the long-term viability of some succession plans into question, particularly if family members are faced with a decision of selling the business to settle an IHT liability.
Understanding your IHT exposure is therefore crucial, particularly if your estate includes high value business assets, agricultural land or an inherited pension fund.
What may have previously been exempt or covered by 100% relief, may now be chargeable and be exposed to IHT at 40%.
The Chancellor has announced that there will be an immediate increase to the rates of capital gains tax (CGT) with the basic rate rising to 18% and the higher rate to 24%.
There will also be a staggered increase to the CGT rates for business asset disposal relief (BADR) and investors’ relief (IR), with effect from 6 April 2025.
The main rates of CGT have been increased for all disposals made on or after 30 October 2024. The tax rates will increase from 10% to 18% at the basic rate and from 20% to 24% at the higher rate. CGT rates applying to disposals of residential property will remain unchanged and are now aligned with the main rates of CGT.
No changes have been made to the annual exempt amount and taxpayers will still be able to claim relief for capital losses and choose to offset these against capital gains in the most tax efficient way.
BADR and IR have also been amended. The rate of CGT on disposals of assets eligible for BADR or IR will increase from 10% to 14% from 6 April 2025, with a further increase to 18% from 6 April 2026.
The lifetime limit for IR has been reduced from £10 million to £1 million for disposals made on or after 30 October 2024. The lifetime limit for BADR remains unchanged at £1 million.
An increase to the rate of CGT was widely expected, however there was little consensus as to what the exact rate would be or from when the changes would take effect. With the immediate changes to tax rates, 2024/25 will be a tax year of multiple CGT rates.
The increase in rates to 18% and 24% aligns the main rates of CGT with the rates for residential property disposals, which should reduce one element of complexity in the system for taxpayers.
Taxpayers should look to ensure that any available losses are utilised in the most tax efficient manner.
The stamp duty land tax (SDLT) surcharge for purchasers of second homes and corporate purchasers of residential property, commonly referred to as the higher rate for additional dwellings (HRAD), will be increased from 3% to 5%.
In addition, the higher rate of SDLT for purchases of high-value property (value exceeding £500,000) by companies, and other corporate vehicles, will increase from 15% to 17%.
The HRAD will increase from 3% to 5% for land transactions with an effective date, usually the date of completion, of on or after 31 October 2024. In addition, for land transactions with an effective date of on or after 1 April 2025, the rates and thresholds for residential SDLT will change. The £250,000 threshold will decrease to £125,000, as planned. A rate of 0% will apply on consideration up to £125,000 and a rate of 2% on the consideration that exceeds £125,000 but does not exceed £250,000. The rates and thresholds will remain unaltered above £250,000, and the increased 5% HRAD will be applicable on top of these rates.
The higher rate of SDLT payable by companies buying high value property worth over £500,000 will be increasing by 2% to 17%. This penal flat rate generally only applies where property is acquired for a non-commercial purpose and relief is available for most developers and investors in property rental businesses.
It should be noted that SDLT only applies to purchases of land in England and Northern Ireland, and the increased HRAD rates do not apply to purchases of property in Scotland and Wales, where different, devolved, land transaction tax regimes apply.
As previously announced in the Spring Budget 2024, there will also be changes to furnished holiday lets (FHL). Currently, FHLs are treated as a business for capital gains tax (CGT), meaning favourable tax reliefs can be claimed such as a lower CGT rate of 10% under current business asset disposal relief rules. Other CGT reliefs, such as rollover relief, can also currently be claimed. For income tax purposes, full relief is currently available for loan interest.
From April 2025, the FHL regime will be abolished and the business will be treated as a normal rental business. This means the standard CGT rates of 18% and 24% on a disposal will apply and only basic rate tax relief for loan interest will be available when calculating taxable profits.
The SDLT changes were not as expected but a change of some description was anticipated. This will increase the SDLT bill for many property owners, although, it is worth noting that relief is still available for the purchases of six or more dwellings, which will be applicable in many commercial arrangements. However, this latest change, coupled with the removal of multiple dwellings relief earlier this year, will represent an undesirable increase on land transaction costs especially for smaller investors and developers.
It is also worth observing that there were not any associated substantive changes to the HRAD legislation, other than the increase of rates. This means that cashflow problems will be exacerbated for purchasers who must pay the HRAD on the purchase of a new residence and later reclaim it.
There was no mention of any changes to the first time buyers' (FTB) relief, or the non-UK resident surcharge as had been rumoured beforehand. However, it is expected that the thresholds for FTB relief will reduce back to £300,000 and £500,000 (from £425,000 and £625,000) with effect from 1 April 2025, as announced by the previous Government, although this was not specifically mentioned.
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