UK Budget Update - 30.10.24

The Chancellor’s Budget, the first by a female Chancellor and the first by a Labour Government for 14 years, certainly did take some ‘difficult decisions’. As promised from the start of the Labour manifesto, there were no changes to Income Tax, VAT or Employee’s NIC. Income Tax allowances and thresholds remain frozen as enacted by the previous government, up to 2028/29, they will then increase with inflation. However, there were significant changes from an investment and wealth planning perspective.

Key tax changes

Capital Gains Tax (CGT) is increasing, up from 10% and 20% to 18% & 24% for basic and higher rate taxpayers, respectively. The increased rates are effective for disposals made on or after Budget Day. CGT on property disposals remains at 18% & 24%.
Business Asset Disposal Relief remains at £1m, but the tax on gains will rise from 10% to 14% from April 2025 and to 18% from April 2026. CGT on carried interest will be levied at 32% from April 2025 and from April 2026 simpler rules will be applied.
Employers National Insurance Contributions (NIC) will increase by 1.2% to 15% from April 2025. In addition, the employer’s secondary NIC threshold (the level of an employee’s salary when NICs start to be paid by the employer) will reduce from £9,100 to £5,000 per annum from April 2025.
Inheritance tax (IHT) will apply to beneficiaries of inherited pensions from April 2027. We still need some clarity on the income tax position on inherited pensions as they could then be subject to IHT and income tax. The freezing of the IHT allowances and nil rate bands has been extended from 2028 to 2030.
From April 2026, assets qualifying for Business Property Relief (BPR) or Agricultural Property Relief (APR) up to a combined £1m remain 100% exempt, but any value in excess of this amount will only receive 50% relief.
AIM shares will no longer have full exemption from IHT. Instead, AIM shares will attract an effective inheritance tax rate of 20% if they are held for two years as the government reduces the rate of business relief to 50% in all circumstances for shares not listed on the markets of a recognised stock exchange (such as AIM).
The Non-dom tax regime will be abolished from April 2025 and replaced with a residence based regime. The temporary repatriation facility, allowing non-doms to bring previously-earned foreign income and gains into the UK at a reduced tax rate will be extended.
Stamp duty of 5% will apply to second homes from 31 October 2024 and VAT on private school fees will be added from January 2025.

Potential market and economic implications

An initial positive market reaction. At the time of writing, the gilt market is taking the Budget announcement positively, with prices rising and yields falling. This supports our portfolios as we’re overweight gilts and prefer short-dated ones.
However, it’s hard to determine the net outcome of the Budget. Adding up the positives and negatives of the Budget is rather difficult without further details, and the net result looks highly uncertain. Taken at face value, these hypothetical near- and medium-term changes could boost economic growth, at least to a small extent. However, it could cause inflation to rise, especially if the National Living Wage was to increase beyond expectations.
There are implications for the Bank of England (BoE). First, there’s a risk of slower interest rate cuts if both growth and inflation do rise more than expected. Second, much will depend on the impact of the extra debt issuance on long-term bond yields. If they were to rise because of concerns on the public finances, the BoE might face a dilemma: should they ease financial conditions to mitigate instability, or just focus on inflation and continue to cut at a measured pace
We think the BoE will cut rates, but sterling could weaken. With UK inflation now below the 2% central bank target and signs that economic growth is slowing, we think the BoE will catch up with other central banks and likely cut rates again before the end of the year (and several times next year). These dynamics could weaken sterling a bit, at least in the near term, or at least mitigate the risks of further strength.

If you have any questions, please speak to your usual Client Advisor.

Important Information

Information correct as of 31 October 2024.

Investing puts your capital at risk.
The value of your investments can go down as well as up, and you could lose some or all of the money invested.
Tax treatment depends on individual circumstances and is subject to change.
Tax planning is not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.

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A significant policy shift