As Chancellor Rachel Reeves delivered her first Budget this week, here’s a quick snapshot of some of the changes that will affect stamp duty land tax, capital gains and inheritance tax, with some coming into force with immediate effect, and others delayed.
SDLT
Reeves told the Commons that the Stamp Duty Land Tax (SDLT) on the purchase of second homes, including holiday homes and buy-to-let properties, will have an increased surcharge from 3% to 5% on top of normal standard SDLT rates.
This change was made from the day following the budget so affects all current property transactions, apart from those who had already exchanged contacts, even if they were yet to complete. The Treasury forecasts the increased surcharge would earn £310 million per year by 2029-30.
The Chancellor has not changed the expiry date of the temporary changes to stamp duty thresholds, where the tax-free threshold increased from £125,000 to £250,000 and the tax-free threshold for first-time buyers increased from £300,000 to £425,000. These are all due to expire on 31 March 2025. First time buyers may find this article about the SDLT holiday useful.
Contact our Residential Property team for more information.
On company property purchases in excess of £500,000, on transaction effective dates on or after 31 October 2024, the rate of SDLT is increasing from 15% to 17%.
Contact our Commercial Property team for more information.
Inheritance Tax
The Chancellor announced the inheritance tax (IHT) threshold freeze would be extended until 2030. Inheritance tax is charged at 40% on the value of estates above the nil rate band of £325,000 pounds and residence nil-rate band at £175,000. This may pull more estates, which many would consider relatively modest, into the inheritance tax net.
One of the most significant changes was Rachel Reeves decision to bring pensions in scope for inheritance tax. Currently, unused private pensions are excluded from inheritance tax if someone dies before the age of 75, and a lump sum can be paid to an individual’s beneficiaries tax-free, up to approximately £1 m.
From April 2027, pension pots under defined contribution schemes will be included in IHT calculations. In practice, this means when an individual dies they can still pass on the proceeds, but the pension pot will get added to property and shares as part of potentially chargeable assets. Some people used to touch their pension post ‘last’ and use up other assets first e.g. ISAs, because of the favourable IHT benefits.
The government is finalising the mechanics of how this will work in practice, but early proposals are that the pension scheme administrators will be responsible for paying the tax attributable to the pension funds from the pension pot, rather than it being the responsibility of the personal representatives.
There were changes to how Alternative Investment Market (AIM) shares are treated for inheritance tax purposes. Currently, certain AIM listed stocks can qualify for Business Property Relief and were IHT free. The Chancellor has announced a blanket 20% IHT rate on these shares, half the potential 40% benefit that was previously available, if the shares are held for more than two years before the investors dies.
The Government is also reforming Business Property Relief and Agricultural Property Relief. From April 2026, the first £1 m of combined business and agricultural assets will continue to attract no inheritance tax at all. For agricultural assets over £1 m, IHT will apply with a 50 per cent relief and at an effective rate of 20 per cent. Previously these reliefs meant that businesses and farms could often be passed down a generation without any IHT.
As part of the focus on removing non-dom tax avoidance, the government is also ending the use of offshore trusts to shelter assets from IHT. The current domicile-based system of Inheritance Tax will be replaced with a new residence-based system, which will affect the scope of non-UK property brought into UK Inheritance Tax for individuals and trusts.
Contact our Wills, Trusts & Estates team for more information.
Capital Gains Tax
With effect from 31st October 2024, disposals of all chargeable assets (except carried interest rights) will be taxed on individuals at the rate of 18%, if the gain falls into the basic rate band, and 24%, if the gain falls into the higher rate band. Also, all gains by personal representatives and trustees (again, except carried interest rights) will be taxed at 24%. No changes will be made to the rates applying to the disposal of residential properties of 18% and 24%.
Business asset disposal relief (on the first £1 m) on the disposal of business assets will remain taxed at 10% until 5 April 2025. From 6 April 2025 the rate will rise to 14%, and then to 18% from 6 April 2026.
Contact our Corporate & Commercial team for more information.