Autumn Budget 2024 brought various changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT). Let’s look at what they were, and how they change the landscape for business owners looking to sell, retire or pass assets on.
CGT Budget Changes
From 30th October 2024:
- The lower rate of CGT increased from 10% to 18%
- The higher rate of CGT increased from 20% to 24%
- No changes to the residential rates of CGT which remain at 18% (lower) and 24% (higher) – thus the main rates of CGT and the residential rates are now aligned
From 6th April 2025:
- The rate of Business Asset Disposal Relief (BADR) and Investors’ Relief (IR) will rise from 10% to 14%
From 6th April 2026:
- The rate of BADR and IR will rise from 14% to 18%
No change to the lifetime limit for BADR of £1m, but the IR lifetime limit comes down to £1m from £10m from 30th October 2024
It is worth noting IR won’t be relevant to most smaller businesses, and isn’t a well known or taken up relief, and for smaller proprietorial owned business not that useful.
IHT Budget Changes
The main rate of IHT 40% was unchanged, as was the Nil Rate Band of £325k and the Main Residence Nil Rate Band (RNRB) of 375k. The RNRB tapers at a rate of £1 for every £2 where the net value of the estate exceeds £2 million.
There were some major IHT changes in the Budget however:
- IHT relief on AIM shares now restricted to 50% rather than 100%. This seems a reasonable restriction as they are listed, trade-able investment shares, albeit more risky than main market listed shares; a lot of packed IHT planning schemes have relied on AIM investments. This applies from April 2026.
- Pension schemes held in trust will be part of the death estate for IHT calculation, rather than outside it. The trustees will pay the IHT. This applies from April 2027.
- Restriction of 100% Business Property Relief (BPR) and Agricultural Relief (APR) to £1m from April 2026.
The restrictions on BPR and APR will be of most concern for business owners.
BPR is generally given at 100% on the value of a business, and 50% on assets owned personally but used in a business.
APR is a similar set of reliefs at 100% and 50% on Agricultural (rather than business) property.
In terms of the lower rate of BPR/APR:
- 50% APR deals with situations like Agricultural Land which is let rather than farmed (dependent on the tenancy terms)
- 50% BPR is most common for situations where a property, eg a shop or office, is owned personally, but used by a company or partnership which the owner is part of.
From April 2026, only the first £1m of assets qualifying for 100% BPR or APR will now be relieved at 100%. Over and above that, any further BPR or APR will be at 50% not 100%. This reduces the effective IHT rate from 40% to 20% above £1m.
Whilst the £325k Nil Rate Band and £175k Residence Nil Rate Band are transferable between spouses, the £1m for BPR/APR isn’t, so use will need to be planned more carefully. However, and allowing for the fact that the RNRB of £175k tapers at rate of £1 for every £2 where the net value of the estate exceeds £2 million, there is still potentially £3m of 100% relief for a married couple, and indeed potentially an unlimited relief if gifts are made during lifetime, and the donor survives seven years, as the PET (Potentially Exempt transfer) regime is unchanged, which exempts from IHT almost all life time transfers so long as the donor survives seven years.
What Didn’t Change
There were some valuable planning tools that could have been attacked but were not:
- For CGT there is still 100% holdover on gifts of business assets – the recipient pays the CGT when they sell.
- For CGT there is still a tax free uplift to market value at death.
- For CGT whilst rates have risen they are still well below Income Tax levels.
- For IHT the PET (Potentially Exempt Transfer) regime remains – this means most lifetime gifts are free of IHT so long as the donor survives seven years.
- For IHT the concept of a Deed of Variation remains which allows a will to be re written after someone dies, and is a valuable tool for managing tax, especially in premature deaths.
Considerations for Planning
One major issue for business owners is that planning for succession will need to start earlier. Whereas 100% BPR/APR would have dealt with a business still owned at death, the limit of £1m per person means this cannot be relied on. The simple solution is to pass on assets during lifetime and make use of the IHT and CGT exemptions for lifetime gifts with seven years survivor-ship. Premature death during seven years after the gift is a potential problem; there are a couple of possible solutions here, one being a term assurance policy, the other being allocating other assets to “self insure” the risk; assets that could be sold if the PET failed due to death within seven years.
However with a scenario like this bear in mind that, whereas passing business assets on at death gives an outright tax saving via APR/BPR and the automatic CGT uplift at death, passing qualifying assets on during lifetime using the CGT holdover exemption for gifts of business assets is a deferral rather than an outright saving, and passes tax on to the next generation.
If an outright sale of a business is planned with the proceeds funding retirement, then the decrease in the value of BADR will be a concern – from a maximum of £1m at 10% to £1m at 18%, potentially £80k of extra tax. The answer, at first glance, may be to accelerate sale plans to lock into the lower rates. However the old adage of “act in haste, repent at leisure” applies here; a rushed sale may possibly not realise the full value of the business, whereas taking time and preparing for a sale may yield greater net proceeds, even allowing for higher tax charges.
Frequently, as accountants we see people anxious to minimise IHT, which is understandable, but the caution here is that the older generations needs in later life and retirement are often not thought through in the scramble to be able to pass assets on free of IHT, and indeed a potentially chargeable estate when someone approaches retirement may fall to well below IHT thresholds by the time they reach normal life expectancy.
Finally, for anyone closing a company and planning to extract residual funds using BADR – and this will apply to many of our PSC clients – the increase in the CGT rate applying where BADR is claimed will tend to suggest earlier action. However a caution exists not to act precipitously, and wind down revenue generating activities earlier than planned for a comparatively modest saving in CGT.
In conclusion, the changes in the budget do add an extra layer of complexity to small business tax planning, but they are not the catastrophe that some sections of the media are claiming. There are just some extra variables to bring into the mix. It still remains that, for capital taxes, death is the best planning tool of all, however many will probably think it better to be taxed and alive than tax free and dead – a cliche, but it does contextualize that there is more than just tax to consider in these matters.
