Capital Gains Tax ‘Squeeze’
As widely speculated before the Budget, there was a significant increase in Capital Gains Tax (CGT) rates. The basic and higher rates have moved from 10% and 20% to 18% and 24%, respectively. Furthermore, the dividend allowance, initially introduced in 2016/17 at £5,000, has been reduced by previous Budgets and now stands at only £500. These measures, along with continual squeezes in the CGT annual exempt amount, will make unwrapped investments less attractive to many savers.
Inheritance Tax Changes and the Resident Nil Rate Band (RNRB) Pension Trap
From 6 April 2025, a person’s estate will become potentially liable to UK Inheritance Tax (IHT) on death if they’ve been a UK tax resident for 10 out of the last 20 tax years. The test for tax residence will use the existing statutory residence test, which should remove the uncertainty and complexity that previously surrounded the domicile-based regime. Additionally, the Budget confirmed the removal of the remittance basis of taxation from 6 April 2025 and various trust protections.
More surprisingly, it was announced that unused pension funds and death benefits will be subject to IHT from 6 April 2027, with a consultation released around its implementation.
For clients who have always been UK residents, most of these changes will make little difference. However, there’s an additional tax trap for some larger estates due to the RNRB tapering provisions, where the amount of RNRB available is reduced by £1 for every £2 that the estate exceeds £2 million. The addition of pension funds from April 2027 could lead to an effective tax rate of 60%, as illustrated in the table below:
With careful financial planning, the impact of the changes can be mitigated for clients. Insurance policy wrappers can allow clients to defer tax liabilities, which will now be of interest to a wider population given the CGT changes. Insurance policies can also be used alongside trust solutions to help reduce exposure to UK IHT.
A full briefing, compiling the announcements made in the October Budget along with many changes announced over the past year, is available below.