We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
Inheritance tax, capital gains tax and stamp duty have all changed considerably in recent years. ACCAs tax lecturer Tim Palmer reviews the latest changes
Inheritance Tax (IHT)
The main rate of IHT remains at 40%, reduced to 36% for those estates where 10% or more is left to a qualifying charity. The present nil rate band threshold of £325,000 will remain frozen until 2030. Additionally, the residence nil rate band of £175,000 will remain the same until 2030.
IHT: tapered restrictions to the Residence Nil Rate Band (RNRB)
There will additionally be a tapered restriction and a withdrawal of the residence nil rate band for estates (yes, total estates not homes) with a net value of more than £2m at the rate of £1 for every £2 over this threshold.
Example 1
Lucy (a single parent) dies on 1 May 2025 and leaves her home worth £900,000 to her daughter. Her total net estate (including the above property) is worth £2.2m.
What is the ‘residence nil rate band’?
Net estate Restriction
(£2,200,000 – £2,000,000) / 2
= £200,000 / 2 = £100,000
Accordingly, the restriction on the ‘residence nil rate band’ is £100,000.
The residence nil rate band will be £175,000 less £100,000 ie £75,000.
For any unwidowed individual, with an estate worth over £2.35m, there is no additional nil-rate band!
Example 2
Net estate Restriction
(£2,350,000 – £2,000,000) / 2
= £350,000 / 2 = £175,000
No residence nil-rate band available due to restriction ie £175,000 – £175,000 = £0.
At present, the maximum RNRB available on the second death is £350,000 (£175,000 x 2). However, if the second surviving spouse’s estate is worth more than £2.7m, then both RNRBs will be lost. It is worth noting that you have to be careful in calculating the net value of the client’s estate, to see if it exceeds £2m. You have to include, amongst your assets on death, the family home and the value of your business or farm before the deduction of 100% Business Property Relief (BPR) or Agricultural Property Relief (APR).
Accordingly, many estates, when including the value of their business, without any deduction for BPR, will exceed £2.7m. They will not be able to claim the residence nil rate band!
Business owners and farmers
The government is going to reform both BPR and APR from 6 April 2026. This is one of the biggest stories that has arisen out of last year’s Budget. Many farmers are extremely unhappy regarding the proposed IHT/APR changes.
At the moment, there is no financial limit placed on these reliefs, and relief of up to 100% is currently available. However, from April 2026, the 100% relief will only be given to the first £1m of combined agricultural and business property. The relief will reduce to 50% on the value that exceeds £1m.
Stamp Duty Land Tax — residential property from 1 April 2025
| Property value | Rate (on portion of value above threshold) | Rate (on portion of value above threshold) if purchase is of an additional residential property |
| £0 to £125,000 | 0% | 5% |
| £125,001 to £250,000 | 2% | 7% |
| £250,001 to £925,000 | 5% | 10% |
| £925,001 to £1.5m | 10% | 15% |
| Over £1.5m | 12% | 17% |
The end of the stamp duty holiday
From 1 April 2025, the property limit for the SDLT reduction for first-time buyers has resorted to £500,000 and only the first £300,000 of the value of the property will be exempt from SDLT, with 5% payable on any remainder up to the reduced £500,000 figure. For other buyers, ie those property owners acquiring a new home, from 1 April 2025 the £250,000 exemption has been scrapped and only the first £125,000 of a property purchase will be stamp duty free, with a 2% rate charged from £125,000 to £250,000.
SDLT rates for non-UK residents
An individual will be considered non-UK resident provided they are not present in the UK for at least 183 days in the 12 months prior to the acquisition of the property in question. An individual is UK resident if present in the UK at midnight. The non-resident individual will normally pay a 2% SDLT surcharge if buying a residential property in England or Northern Ireland.
Downsizing in retirement
Many older taxpayers feel that there should be some SDLT concession or reduction in the rates when a retired individual downsizes. For example, Tom and Anne are both aged 68. Their children have left the family home and they want to sell it and move into a smaller home for their retirement. The capital profit they will have made on the sale of the previous family home will have been considerably diminished by the SDLT due on the purchase of their replacement property.
Capital gains tax (CGT)
The rates of CGT changed from 30 October 2024:
- the lower CGT rate (gains up to the basic rate threshold) is now 18%
- the higher CGT rate (gains over the basic rate threshold) is now 24%.
The CGT annual exemption is currently £3,000.
Business Asset Disposal Relief (BADR):
The lifetime BADR allowance will be kept at £1m. In order to eventually match the lower CGT rate of 18%, rates of capital gains tax on gains eligible for BADR will increase over the next few years:
- to 5 April 2025 – 10%
- from 6 April 2025 – 14%
- from 6 April 2026 – 18%.
A lot of people are currently liquidating their companies, extracting the funds as capital distributions, and paying 10% CGT, thereby beating the proposed 14% hike. However, they have to be careful!
The Targeted Anti-Avoidance Rule (TAAR)
Introduction
When the owner of a company liquidates it, extracts capital distributions and then starts the same trade up again within two years, the TAAR could bite. For this anti-avoidance legislation to apply, HMRC has to prove that the owner liquidated the company in order to avoid or reduce a charge to income tax.
If the TAAR applies, then the individual, who has been liable to capital gains tax (CGT) at either 10% (thanks to Business Asset Disposal Relief) or 20% otherwise, will be liable to income tax on the distributions, at higher tax rates of up to 39.35% instead.
Accordingly, if HMRC succeeds with applying the TAAR, they will go back to the capital distributions in the liquidation and re-tax them at the higher income tax distribution rates.
The objective of the TAAR
TAAR was introduced by the Finance Act 2016, with little accompanying guidance. The TAAR legislation is found at Income Tax (Trading and Other Income) 2005 section 396B (for UK companies) and section 404A (for non-UK companies).
Its objective was to stamp out the practice of ‘phoenixism’ – the act of starting up a new business soon after winding up a previous one, allowing a shareholder to receive accumulated profits in capital form and, by claiming BADR, paying tax at a rate of just 10% rather than the dividend rates of up to 39.35% that would have otherwise applied.
Prior to 6 April 2022, the rates of income tax applicable to dividend income for the ordinary rate, upper rate and additional rate were 7.5%, 32.5% and 38.1% respectively. Each rate has now increased by 1.25% to 8.75%, 33.75% and 39.35% from April 2022. These increased rates will have a big impact if HMRC applies the TAAR in the future.
The TAAR prevents an individual converting what would otherwise be a dividend into a receipt subject to CGT rather than income tax.
When the TAAR legislation applies
The TAAR will apply if four conditions are met:
Condition A
The individual, immediately before the winding up, had at least a 5% interest in the company. The individual will have at least a 5% interest if he has at least 5% of the ordinary share capital and at least 5% of the voting rights in the company are exercisable by him, by virtue of his holding (ITT01A 2005 s396B(9)).
Condition B
The company is a close company when the liquidator is appointed ie at the start of its winding up, or has been a close company at any time in the two years ending with the start of the winding up (ITT01A 2005 s396B(3)).
Condition C
The individual receiving the distribution continues to carry on, or be involved with, the same trade or a trade similar to that of the wound up company at any time within two years from the date of the distribution (ITT01A 2005 s396B(4)).
Accordingly, there is a danger of the TAAR applying if the shareholder liquidates the company and then starts to carry on the same or a similar trade, within two years from the date of the last capital distribution via:
- a sole trader
- a partnership
- a company
- an LLP
- an employee of a connected person.
Condition D
It is reasonable to assume that, having regard to all the circumstances and, in particular, the fact that condition C is met, the main purpose or one of the main purposes of the winding up (or of arrangements of which it is part) is the avoidance or reduction of a charge to income tax (ITT01A 2005 s396B(5)).
If all four conditions are met and the TAAR bites, then the liquidation distributions would be subject to income tax, not CGT, with business asset disposal relief not being available. Conditions A and B are relatively straightforward. However, conditions C and D are not.
Conclusion
Taxpayers need to be very careful regarding liquidating their company and then starting the same or a similar trade up again within the following two years. The income tax rates on dividends have now increased, making this anti-avoidance legislation very expensive. There is also the issue of penalties to consider. If HMRC has recategorised a capital sum as a dividend, then no doubt they will also raise the question of penalties.