As is often the case, the Budget was as remarkable for what it left out as for the measures announced. Much of the detail is still to be released but here is our initial take on the main Budget tax measures where we expect them to affect our clients.
Overall this was a broadly neutral Budget with giveaways largely matching tax rises. The gilt markets appear unfazed and, if anything, pleased with Healey’s emphasis on fiscal rules.
The omissions
Before diving into what was announced it’s worth rehearsing the rumours that didn’t make it to the Budget box. Restriction of the ability to extract 25% of a pension pot as a tax free lump sum has been a persistent source of speculation. Restriction would always have been politically difficult given that pensions are a decades long savings project and many people rely on those sums for mortgage etc repayments. Nevertheless, it is good to see this well-known rule survive intact.
Increases in capital gains rates, possibly bringing rates into line with income tax have also been mooted, and yet the rates are unchanged. Also unaltered is the wiping of historic gains on death which means that beneficiaries of an estate only pay capital gains tax on inherited assets to the extent of value increases since the death.
Also intact is the ability to make gifts out of surplus income. This useful measure allows those with more income than they need to make regular gifts of the excess with an immediate Inheritance Tax exemption, rather than waiting for a seven-year survival period to pass.
Less helpfully nothing has been done to reverse frozen allowances or the ‘cliff edges’ within the system which result in marginal tax rates of 60% or more.
Individual taxes
Healey reconfirmed his commitment not to raise taxes on working people and the Budget papers note that rates of tax paid on earnings are unchanged. However, Budget 2025 having increased income tax rates on savings and property income by 2% across all tax bands from April 2027, Healey has doubled down by adding a further 2% to these classes of income. Interest and rental profits will therefore now be taxed at 24%, 44% and 49%. This adds further pain to landlords who already feel they’ve borne their fair share. It also emphasises the importance of using tax wrappers such as ISAs and pensions to build wealth.
Rachel Reeves’s plan to cap the cash ISA annual limit at £12,000 for the under 65s has been reversed. This is probably a victory for common sense given that it required anti avoidance measures to tax cash in stocks ISAs, and was unlikely to achieve its aim of promoting stock market investment. Instead there is to be a First Time Investor ISA. This is at the drawing board stage of development and will require consultation with industry.
There is to be a Pension Tax Allowance designed to ensure that those living on a state pension are not subject to tax. The state pension is paid gross and so, in the absence of such an allowance, pensioners would have needed to file under self assessment in order to pay.
In an effort to revitalise the property market, the government is to establish a new Your First Home scheme aimed at first time buyers. The scheme will provide 20% equity loans to first-time buyers with income below £110,000 (£140,000 in London) who can raise a deposit of 2.5%. Price caps will be set on the property values based on local authority median prices.
Owner managed businesses
Healey announced the reduction of the lifetime limit for Business Asset Disposal Relief (BADR) from £1m to £500k. At this level the relief is almost becoming an irrelevance. In its present form BADR is worth only £60k; from April 2027 that will halve to £30k, so whilst it’s worth having, it won’t make much of a dent in the gains from a significant business disposal. One wonders whether the relief is destined for a gradual phase out.
By contrast, the new Founders’ Relief seems to do for start ups what Entrepreneurs’ relief used to do for a much wider group of business sales. Until March 2020 qualifying vendors got a 10% CGT rate on £10m of gains for most trading business disposals, making Entrepreneurs’ relief worth £1m in cash terms. This new relief will be worth £1.4m (£10m x (24%-10%)).
The Budget announcement on Founders’ Relief is carefully worded – it is to be aimed at ‘talented individuals who take risks to build and scale high-growth, innovative companies in the UK’ Given the relative generosity of the relief one therefore wonders whether there will be very tight restrictions on those who qualify.
Both of these CGT measures take effect from April 2027, so there may be a rush to get deals over the line with £1m of BADR (perhaps not given the limited benefits). Equally someone incubating a start up may want to delay until 7 April of at least until the conditions for Founders’ Relief become clear.
Healey has announced reform of the ‘distributions framework’ – the means by which shareholders extract funds from companies. The current rules are complex but generally work adequately to allow corporate restructures. The stated aim of the changes is to ensure consistency. It’s unlikely that we will see any detail until the new year with changes taking effect from April 2028.
Other issues
The new “High Value Council Tax Surcharge” or ‘mansion tax’ will include a premium of up to 100% (i.e. doubling the total amount payable) if properties are left empty for 12 months or more. There will, however, be schemes to assist those who have trouble finding the funds to pay.
Summary
Most of the eye-catching measures announced in yesterday’s Budget will have limited impact – tariff reductions on marmalade and gherkins for example, or an extra £50 off the electricity bill by extension of VAT relief to July 2027.
However, to get the full picture this Budget needs to be read with the last two. If we take into account the ongoing freezes to personal, capital gains and inheritance tax limits, the additional tax on dividends, interest and rental income and the restrictions on inheritance tax reliefs for businesses and farms, it’s clear that a great deal more tax is being raised.
As ever, we will be helping clients to identify appropriate structures for efficient income and, where appropriate, succession planning.
Clare Munro is our Senior Tax Adviser. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.
What you need to know
Tax laws may change and taxation will vary depending on your own personal circumstances.