‘Like mothers, taxes are often misunderstood, but seldom forgotten.’ – Lord Bramwell, 19th century English jurist

Introduction

The Autumn Budget 2024 (‘the Budget’) saw history being made as Rachel Reeves, who became our first female Chancellor of the Exchequer, set out arguably the biggest tax changes for a generation, set to raise taxes by £41bn by 2029/30 and said to be part of the Government’s plan to revitalise Britain.

In this article, we will summarise the key reforms of the Budget, highlighting those which may be of particular relevance to financial remedy practitioners and their clients.

Key reforms

For those advising separating couples, the two main areas of concern that are likely to require immediate recalculations in any ongoing financial remedy proceedings are:

• increases in Capital Gains Tax (CGT) on business and other assets (but not residential property); and
• changes in the way that Carried Interests are taxed, which affects only those in the world of Private Equity who are remunerated in this way.

It is fair to say that employers and companies will bear a large burden from this Budget. Personal tax has not escaped scrutiny, and the pre-announced VAT on private school fees, CGT and Inheritance Tax (IHT) will also see changes.

Readers should be aware that whilst many of the reforms will take effect from 6 April 2025 (and beyond), some changes, will be implemented sooner, such as the increase in CGT which takes effect from 30 October 2024, and the increase in additional Stamp Duty Land Tax (SDLT) takes effect from 31 October 2024. The imposition of VAT at 20% will also be applied to private school fees from 1 January 2025.

Highlights from the budget

• The national minimum wage will increase by 6.7% to £12.21 an hour in April 2025, with more than 3 million low-paid workers in line for a pay rise.
• The main rate of class 1 employer national insurance contributions (NICs) will be increased by 1.2% from 13.8% to 15.0% with effect from 6 April 2025, and the secondary threshold at which NICs are payable will be reduced from £9,100 to £5,000.
• The main rates of capital gains tax will increase with immediate effect from 10% to 18% for non and basic rate taxpayers, and from 20% to 24% for higher and additional rate taxpayers. The rate for business asset disposal relief (also known as entrepreneur’s relief) will rise to 14% for 2025/26 and 18% from 2026/27. The CGT annual exempt amount for individuals will remain at £3,000 for 2025/26. The annual exempt amount for most trusts will stay at £1,500 (minimum £300).
• Inheritance tax (IHT) business and agricultural 100% reliefs will be capped at a combined total of £1m from April 2026. Above that, the rate of tax relief will be 50%. However, the cap will not apply to Alternative Investment Market (AIM) shares which will just qualify for 50% relief.
• The remittance basis of taxation for non-UK domiciled individuals will be replaced from 6 April 2025 with a residence-based regime. Individuals who opt into the new regime will not pay UK tax on any foreign income and gains arising in their first four years of tax residence. The previous government’s proposal of a 50% reduction in foreign income subject to tax in the first year of the new regime will not go ahead.
• VAT at 20% will be applied to private school fees from 1 January 2025. From 1 April 2025, charitable relief for business rates will be withdrawn.
• Unused pension funds and death benefits will form part of a person’s estate for IHT purposes from 6 April 2027 (but not if they are passed on to spouses or civil partners).
• The additional SDLT rate for second homes and buy-to-let properties increases from 3% to 5% from 31 October 2024. The temporary increases in the 0% SDLT band for first time and other property buyers will end on 31 March 2025.
• There will be a change to the taxation of carried interest, moving from a capital gains tax regime to income tax (relevant to those in the private equity industry).
• In respect of income tax, the personal allowance for 2025/26 will remain at £12,570 and the higher rate threshold will stay at £50,270. The freeze on both will end from April 2028, when the threshold will increase in line with inflation.
• As for dividend tax, the dividend allowance will remain at £500 for 2025/26 and the rates of tax on dividends will be unchanged. In respect of savings, the 0% band for the starting rate for savings income for 2025/26 will remain at its current level of £5,000.

National minimum wage

The national minimum wage will increase to £12.21 an hour in April 2025 (adding £1,400 a year to the income of an eligible full-time worker aged 21 and above). The minimum wage for workers aged 18 to 20 will also increase from £8.60 to £10 an hour (adding £2,500 next year to the income of workers in this bracket). There will be a single adult rate phased in over time to eventually equalise pay for under-21s.

National insurance contributions (NIC)

Whilst there are no increases in rates and no lowering of thresholds for employees, the main rate of employer’s Class 1 NIC will increase from 13.8% to 15% with effect from 6 April 2025. Class 1A and Class 1B employer rates will mirror this increase. With effect from 6 April 2025, the employer’s Class 1 NIC secondary threshold will also be reduced from £9,100 to £5,000 per annum, resulting in an increase in employer NIC contributions as the deductions will start to apply at a considerably lower level of earnings.

The Employment Allowance will be enhanced from £5,000 to £10,500 and eligibility will be eased. This will also take effect from 6 April 2025 and will enable eligible small employers to reduce their NIC liabilities by up to £10,500 per year.

These are big fiscal measures from the budget and are said to raise £25bn by the end of the forecast period (by the end of parliament).

Capital Gains Tax (CGT)

The main rates of CGT have been increased immediately with the lower rate rising from 10% to 18% for non and basic rate taxpayers, and from 20% to 24% for higher rate taxpayers. These will affect disposals made on or after 30 October 2024. However, there will be no changes to the 18% and 24% rates of CGT that apply to residential property gains.

The new, higher rates of 18% and 24%, which brings all asset classes into the same band, does particularly target those who are non or basic rate taxpayers, and could impact planning between spouses where the lower rate income taxpayer held most of the assets that were heavy with gains. When drafting a financial order, careful consideration should be given to whether any of this tax liability can be mitigated, who will be responsible for its payment, and whether indemnities for payment will be required. Legal and tax advice is likely to be essential.

As for the main reliefs from CGT, Business Asset Disposal Relief (BADR) and the less common Investors’ Relief are remaining at their current 10% rate of gains over £1m for the rest of the current 2024/25 tax year, but will increase to 14% for disposals made on or after 6 April 2025, and from 14% to 18% for disposals made on or after 6 April 2026.? The Investors’ Relief lifetime allowance is being reduced from its current generous £10m to just £1m, in line with the existing BADR lifetime allowance.

The changes to BADR will almost double the current rate of Capital Gains Tax for individuals disposing of business assets. Accordingly, any valuations of businesses by a Single Joint Expert or otherwise will need to be updated to reflect the increase in tax and thought will need to be given as to whether it is appropriate to impute the 14% or 18% rates.

Inheritance tax (IHT)

The freeze on the threshold for inheritance tax will be extended for a further two years until 2030, allowing £325,000 to be inherited tax free, rising to £500,000 if the estate includes a residence passed to direct descendants. Married couples will continue to be able to pass on a maximum inheritance of £1m, tax-free.

However, reforms have been announced to Business Property Relief (BPR) and Agricultural Property Relief (APR). From 6 April 2026, the current 100% rate of relief will continue for the first £1m of combined BPR and APR for individuals and trusts, except for shares designated as ‘not listed’ on the markets of recognised stock exchanges such as the Alternative Investment Market (AIM). The rate of relief will then be 50% (reduced from 100%) for such assets above the combined £1m threshold and for all ‘not listed’ shares.

For certain trusts that were established before 30 October 2024, the £1m allowance will apply to each trust. The £1m allowance will be divided between trusts where a settlor sets up multiple trusts on or after 30 October 2024.

The changes to BPR and APR have attracted much comment. Parties who are business owners and landowners will need to review carefully their succession plans to ensure their businesses can endure the increased IHT liability from April 2026. For some, this may mean tightening budgets or taking out life insurance to offset IHT. Under the current rules, life insurance proceeds fall outside an individual’s estate for IHT purposes. For farms, the £1m cap is likely to be insufficiently generous for even very small farms, with those with development value or higher local land prices particularly affected. It is therefore envisaged that landowners will look to fragment ownership ahead of a potential IHT charge on their death. However, such planning will not be an option for those farmers who are financially dependent on their agricultural assets.

A new allowance will apply to the combined value of property in an estate qualifying for 100% business property relief and 100% agricultural property relief. For example, the allowance will cover £1m of property qualifying for business property relief, or a combined £400,000 of agricultural property relief and £600,000 business property relief qualifying for 100% relief. If the total value of the qualifying property to which 100% relief applies is more than £1m, the allowance will be applied proportionately across the qualifying property. For example, if an estate contained agricultural property of £3m and business property of £2m, the allowance 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.

Furthermore, from 6 April 2027, unused pension funds and death benefits payable from a pension will be included in a person’s estate for IHT purposes, unless it is being passed on to one’s UK-domiciled spouse/ civil partner, in which case it will be inherited tax-free. This is a significant change, removing a distortion which has led to pensions being used as a tax planning vehicle to transfer wealth rather than to fund retirement. Individuals are now more likely to access their pensions earlier and/or to draw upon them more heavily in retirement (rather than leaving them exposed to IHT upon their deaths). Also, whilst the IHT spousal exemption will benefit married couples and civil partners, unmarried partners are not within scope.

Private school fees

As expected, the Budget has confirmed that from 1 January 2025, fees for education, boarding, and vocational training provided by private schools in the UK will be subject to VAT at the standard rate of 20%. Under the anti-forestalling measures, pre-payment of fees on or after 29 July 2024 relating to a term starting in or after January 2025 will be subject to VAT.

There are some important nuances, which include modifications to the definition of ‘nursery classes’ to ensure most remain VAT-exempt. Higher Education courses at private schools have also been exempted, as have Further Education Colleges (not private sixth forms).

According to the Office for Budget Responsibility (OBR), the VAT changes could result in 35,000 fewer private school students. Whilst the changes are unlikely to make a material difference to HNW/UHNW clients with children in fee-paying schools, the added financial cost will undoubtedly raise affordability issues for families who are not in that wealth bracket. Parties may need to re-visit the issue of school fees by applying to vary a school fees order, or consider applying for a specific issue order to change a child’s school, if agreement cannot be reached.

At the time of writing, it appears that the Independent Schools Council (ISC), the body which includes most independent schools in the UK, has voted to pursue legal action over this VAT reform. Watch this space.

Non-UK domiciled individuals

As previously announced, the taxation of non-UK domiciled individuals will be substantially reformed. This is a highly complex area and the specific details are beyond the scope of this article. In summary, the remittance basis of taxation for non-UK domiciled individuals will be replaced from 6 April 2025 with a new residence-based regime. Individuals who opt into the new regime will not have to pay UK tax on any foreign income and gains arising in their first four years of tax residence, provided they have not been UK tax resident in the ten tax years immediately prior to their arrival (the FIG regime). The relief will apply whether or not such income and gains are brought into the UK.

The ‘protected settlement’ rules for trusts will be abolished for both new and pre-existing trusts. This will as a general rule result in settlors being taxed on all income and gains arising within a trust after their first four years of residence.

IHT for non-UK domiciled individuals will also move to a residence-based system from 6 April 2025, which is aimed at ending the use of offshore trusts to shelter assets. Those who have been UK resident for ten of the preceding 20 years will become subject to IHT on their worldwide assets (tightening the current rules which applies worldwide IHT exposure after 15 years of UK residence).

Taxpayers will have five months to seek specialist advice and to plan. There are transitional rules for CGT purposes, and a ‘temporary repatriation facility’ (TRF) which will allow individuals to elect for foreign income and gains which have arisen under the current remittance regime, and not yet brought to the UK, to be taxed at special rate.

Stamp Duty Land Tax (SDLT)

The additional dwellings SDLT surcharge will be increased from 3% to 5%. This will take effect on 31 October 2024. Where contracts are exchanged prior to that date but complete (or are substantially performed) after that date, transitional rules may apply. Coupled with the abolition of multiple dwellings relief earlier this year, the increase in the SDLT surcharge for additional dwellings will have an impact on smaller scale investors in residential property.

The single rate of SDLT charged on corporates purchasing residential dwellings costing more than £500,000 (where they are not intended to be let out on a commercial basis) will also be increased from 15% to 17%. It is also worth noting that the Annual Tax on Enveloped Dwellings (ATED) for the 2025 to 2026 chargeable period will rise by 1.7% from 1 April 2025. This affects residential properties held by companies.

The threshold of the 0% SDLT band for residential property will be cut from £250,000 to £125,000 from 1 April 2025. Between £125,001 and £250,000 a rate of 2% will apply. The 0% band for first time buyers will be reduced to £300,000 from 1 April 2025 for properties valued up to £500,000. These changes will likely impact small money cases where available assets will have to be stretched even further to meet housing needs.

Carried interest

From April 2026, all carried interest, mainly held by individuals engaged in private equity and hedge fund businesses, will be taxed within the income tax framework and subject to class 4 NICs. The rate of income tax for qualifying carried interest will be adjusted by applying a 72.5% multiplier, which when applied to the current top rate of income tax of 45%, yields a top rate of carried interest income tax of 32.6%. As an interim step, the current two CGT rates for carried interest will increase to 32% from 6 April 2025. There will be a consultation on introducing further conditions for access to the regime.

Corporate Tax

The Chancellor has decided to maintain the 25% headline corporation tax rate. The small profits rate will stay at 19% for the financial year starting 1 April 2025. The government has committed to maintaining full expensing, the annual investment allowance cap at £1m, and research and development (R&D) relief rates.

Conclusion

In summary, the Budget has wide-ranging consequences for divorcing couples. The vast majority of financial remedy proceedings that have not yet been finalised will need to be reviewed before they are concluded to ensure that any underlying tax calculations remain appropriate.

Cases that involve only residential properties are the least likely to be affected, but any tax calculations involving businesses or business assets will need to be updated to reflect the new rates. Farming families are likely to be those most significantly affected and although the changes in the Budget relate to IHT and will certainly affect succession planning, it would be surprising if they did not also have an impact on current financial remedy proceedings.

Finally, any international cases involving non-UK domiciled individuals will need to be revisited in the light of the new residence-based regime.

Jennifer Lee

Roger Isaacs

Note: This article is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.