On 30 October 2024 the UK’s new Chancellor Rachel Reeves delivered the first Budget of the Starmer government, the first Labour Budget for 14 years and the first Budget delivered by a female Chancellor. Positioned as a Budget to fix the foundations of the UK and to deliver change the government had spent a number of months preparing the UK for difficult decisions, and the result was a £40Bn increase in taxation.
Half of that figure will be paid by employers with employer’s national insurance contributions (‘NICs’) rising from 13.8% to 15% and the band at which they apply nearly halving. With remuneration being the single largest cost in the asset management industry this will have a significant impact, however managers structured as limited liability partnership (‘LLPs’) will continue to benefit from the lower rates of taxation on partnership allocations.
As anticipated the headline capital gains tax (‘CGT’) rate will increase from 20% to 24%, as will the rate that private equity managers pay on carried interest from 28% to 32%, but the rise is modest and far from the alignment with income tax rates that many had feared. As such reporting fund status (‘RFS’) for offshore funds will continue to provide a beneficial tax treatment for UK investors.
Business asset disposal relief (previously known as entrepreneur’s relief) available for owner-managers selling their business will be cut sharply, with effective rates increasing 80% over the next two years, from 10% to 18%. This is a disappointing move given the need to encourage growth in the UK economy noting the relief was originally introduced by the then Labour Chancellor Gordon Brown in 2008.
As announced by the previous government the UK’s non-domicile regime will come to an end in April 2025, to be replaced by a new residence based regime. Much of the detail is yet to be released but the expectation is that the Labour version will be less favourable.
It had been rumoured that tax relief for pension contributions would be restricted, but no amendments were announced, albeit in practice this is already fairly limited for many in the asset management industry. The major change to pensions comes in the form of inheritance tax (‘IHT’) changes that will see pension pots previously excluded from the regime come within the charge of inheritance tax. The current pension regime was introduced in 2006 by the A-Day reforms under the Tony Blair Labour government. Individuals who have been saving for their future and the next generation under the current regime are likely to be disappointed by a fundamental change in the parameters.
In their election manifesto Labour promised to not increase taxes for working people, specifically referencing income tax, NICs and VAT. The Chancellor was clear to emphasise in her speech that they had delivered on that promise, however with the Institute of Fiscal Studies confirming that UK taxation is now 38.2% of the GDP (at the highest level ever) it will have to be funded by someone.
National Insurance Contributions
From 6 April 2025 the rate of employers’ NICs will be increased by 1.2% to 15%. The per‑employee threshold at which employers start to pay NICs will be reduced from £9,100 per year to £5,000 per year.
The employment allowance currently allows businesses with employer NICs bills of £100,000 or less in the previous tax year to deduct £5,000 from their employer NICs bill. The amount of the employment allowance will be increased from £5,000 to £10,500 and the £100,000 threshold for eligibility will be removed. In addition, the government is extending the employer NICs relief for employers hiring qualifying veterans for a further year from 6 April 2025 until 5 April 2026.
For an asset manager with employees the change equates to an increase in employer’s NIC of approximately £1,150 for an employee on £50k per annum, an increase of £1,750 for an employee on £100k per annum and £2,950 for an employee on £200k per annum. Forecasts for the year ahead will need to be revised to take account of the changes and the impact on the bonus pools available.
Capital Gains Tax
CGT rates applied to gains on assets (other than residential property and carried interest) have been increased with immediate effect for disposals made on or after 30 October 2024 with the higher rate increasing from 20% to 24%.
There had been concern that the CGT rates could be more closely aligned with income tax rates, potentially jeopardising the benefit of RFS for UK investors in offshore funds. The regime provides an advantageous tax treatment for UK individual investors in offshore funds by allowing them to access lower capital gains tax rates (now 24%), as opposed higher income tax rates which is the default position (at up to 45%). The announcement of a modest increase will be welcomed across the asset management industry. To assist both investors and fund managers we have developed a tool to quickly analyse the benefits of the regime for UK based individual investors calculating the potential economic benefit over a 1-5 year time horizon.
The CGT rates that applies to residential property disposals will remain unchanged at 18% and 24%, which will mean these rates are now aligned with the CGT rates on other assets. The CGT annual exempt amount will remain at £3,000, which was initially brought in from 6 April 2024.
Another key change comes to the Business Asset Disposal Relief (‘BADR’). There had been rumours that the BADR lifetime limit would be reduced or removed completely, but this is not the case, and the lifetime limit remains at £1 million. However, the lifetime limit for Investors’ Relief (IR) is being reduced from £10 million to £1 million, in line with the BADR lifetime limit, for IR qualifying disposals made on or after 30 October 2024. Further to this, from there will be an increase in the CGT rates for disposals made under BADR and IR, which will increase from 10% to 14% for disposals made on or after 6 April 2025, with a further increase to 18% from 6 April 2026.
Carried Interest
With the government keen to remove the carried interest “loophole” (an odd phrase given the longstanding nature of the legislation) the Chancellor announced that the main rate will been increased from 28% to 32% from April 2025.
Further changes to carried interest will be introduced from April 2026, bringing carried interest within the income tax framework, subjecting it to income tax and NICs. The government has stated that it recognises that carried interest has unique characteristics and will therefore introduce bespoke rules for carried interest, where only 72.5% of ‘qualifying’ carried interest will be subject to tax.
Further detail was provided in the full Budget report in which carried interest was described as a performance-related reward received by a small population of fund management executives adding that the government believes there is a compelling case for reform in this area. The implication being that the initial increase in rates may only be an initial step.
In a separate document HMRC responded to the recent call for evidence and gave details of the new income tax framework. Broadly this will be to retain the income based carried interest regime for short term carry (less than a 40 months average asset holding period). The exception for employment related securities will be removed.
Additionally other carried interest (qualifying) will be treated as profits of a deemed trade and taxed as income and be subject to class 4 national insurance contributions. However, the carry will be multiplied to 72.5% giving an effective income tax rate of 34.075% including class 4 NIC (highest marginal rates assumed). This will be the only charge applied as the parallel charge on the actual constituents of the carry e.g., dividends will be removed.
Income Tax
The basic rate of income tax remains at 20%, the higher rate at 40% and the additional rate at 45% for 2025/26. The previous government reduced the point at which individuals pay the additional rate of 45% from £150,000 to £125,140 for the current tax year and this will continue going forward.
The income tax personal allowance and basic rate limit are fixed at their current levels until April 2028, but the Chancellor promised that they would no longer be frozen beyond that date. They are £12,570 and £37,700 respectively. For those entitled to a full personal allowance, the point at which they will pay income tax at the higher rate will continue at £50,270.
Non-Domicile Changes
Building on previous announcements regarding the removal of the non-domicile regime, the Chancellor confirmed the abolition of the remittance basis of taxation based on domicile status, with a new tax regime based on residence from 6 April 2025. The new regime will provide 100% relief on foreign income and gains (‘FIGs’) for new arrivals to the UK in their first 4 years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival (4-year FIGs regime).
The protection from tax on FIGs arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the 4-year FIGs regime.
Transitionally, for capital gains tax purposes, current and past remittance basis users will be able to rebase foreign assets they held on 5 April 2017 to their value at that date when they dispose of them. Any FIGs that arose on or before the 5 April 2025, while an individual was taxed under the remittance basis, will continue to be taxed when remitted to the UK under the current rules. This includes remittances of by those who are eligible for the new 4-year FIGs regime.
A new ‘temporary repatriation facility’ will be available for individuals who have previously claimed the remittance basis. They will be able to designate and remit at a reduced rate FIGs that arose prior to the changes. This includes unattributed FIGs held within trust structures. The temporary repatriation facility will be available for a limited period of 3 tax years, from 2025 to 2026, and the rate will be 12% for the first 2 years and 15% in the final tax year of operation.
The current domicile-based system of inheritance tax will be replaced with a new residence-based system. This will affect the scope of non-UK property brought into UK inheritance tax for individuals and trusts. An individual is long-term resident (and in scope for inheritance tax on their non-UK assets) when they have been resident in the UK for at least 10 out of the last 20 tax years and then remain in scope for between 3 and 10 years after leaving the UK. Subject to transitional points, any non-UK assets a person put into a settlement will be subject to inheritance tax charges at times when the settlor is long-term resident.
However, it does go further in that any settlor interested trusts are no longer protected after the settlor is no longer able to take advantage of the FIGs regime. New income and gains will be taxable in certain cases. Others receiving benefits from a trust may also be taxable. The inheritance tax position of trust assets will also match the position of the settlor.
Draft legislation (covering over 100 pages) has been released and we will be studying this and would encourage a review of any planning in place by anyone who is a long-term resident in the UK or is intending to be within the new 4-year regime.
The current regime for non-domiciled individuals has been part of the UK tax landscape for 225 years, a measure dating back to colonial times to protect overseas wealth from wartime taxes. The change comes at a time when there is an increasing global shift in people and wealth – with many jurisdictions using their tax system to compete. From a policy perspective the removal of the regime will be a fundamental change in how the UK is perceived externally at a time when other jurisdictions are implementing similar regimes. In the years to come it will be important to see what impact this has on the UK’s ability to attract overseas talent and investment. How the change is communicated will be crucial to long-term competitiveness, particularly to individuals with wealth wrapped up in unrealised assets.
Overseas Workday Relief
To reflect the abolition non-domicile status the overseas workday relief will be amended to 4 years to align with the new 4-year FIGs regime. The removal of the remittance basis means it will no longer be necessary to keep part of their employment income offshore and in an offshore bank account to benefit from relief.
From 6 April 2025, overseas workday relief will be subject to a financial limit on the amount of relief that can be claimed, this is the lower of £300,000 or 30% of an individual’s total employment income. Employers or their agents will no longer be required to wait for HMRC to approve their application for a direction to operate PAYE on the proportion of an employee’s employment income for work carried out in the UK.
In addition, individuals will not be able to claim income tax relief on chargeable overseas earnings for income earned on or after 6 April 2025. This relief applied to earnings relating to a foreign employment carried out wholly abroad for those who do not qualify for overseas workday relief. These earnings will continue to be taxable on the remittance basis if brought to the UK after 6 April 2025 and are eligible for the temporary repatriation facility. The exemption to travel costs incurred by non-domiciled employees that are paid for by employers when they come to work in the UK and any business-related travel within the time limit of five years will be reduced to 4 years to align with the 4-year FIGs regime.
The current proposal is similar to that announced by the previous government in Spring 2024. That is a 4-year exemption for FIGs after becoming UK tax resident provided that the individual has not been resident in the UK in any of the 10 years before arrival.
Corporation Tax
The government announced that headline rate of corporation tax will be capped at 25% for the life of the Labour Parliament. The small profits rate and marginal relief will be maintained at their current rates and thresholds. Further announcements on modernisation of the technology the corporation tax system relies on will be published in the Spring. This stability will be widely welcomed by asset managers and the wider business community in the UK.
Dividends
The taxation of dividends for 2025/26 will remain as follows:
- Ordinary rate: 8.75%
- Upper rate: 33.75%
- Additional rate: 39.35%
The corporation tax due on directors’ overdrawn loan accounts is paid at 33.75% and remains unchanged.
However the government has introduced an immediate change to the taxation of loans from and benefits conferred on the participators of close companies which exploit the current mechanics of the anti-avoidance rule. The measure will tackle arrangements aimed at avoiding existing legislation meant to prevent untaxed extractions of company funds by their shareholders. This supports the government’s objective of a fair tax system. It will also bring the targeted anti-avoidance rule (‘TAAR’) within the loans to participators regime into line with other TAARs. Where there are tax avoidance arrangements, a more modern TAAR would not allow later relief as here in the case of a return payment.
LLP vs Ltd
UK asset managers will continue to look at the comparison in effective tax rates between LLP and Ltd structures. The rates for 2024/25 remained static compared to previous years, but the increase in employer’s NIC widens the gap in 2025/26 further in favour of the LLP which remains the most beneficial for pure profit extraction. Albeit optionality and planning opportunities afforded by Ltd company structures continue to be appealing for mature managers.
There was no announcements in relation to the salaried and mixed member rules and we fear that the associated scrutiny placed on managers is set to continue despite the ongoing BlueCrest case. The latest round of appeals in that case are due to be held next month and the final chapter of the saga may well have a fundamental impact on the industry. In any case the widening gap between the LLP and Ltd continues to feel ripe for filling with something equivalent to the employer’s NIC, albeit this needs to be balanced with the lack of optionality to roll-up profits under the mixed membership rules.
As we reach the 10-year anniversary of the mixed membership and salaried member rules it is beyond disappointing that HMRC’s interpretation of the legislation continues to evolve, despite the high profile loss in the BlueCrest case in both the first and upper tier tribunals. HMRC continue to drag out enquiries and have amended their guidance on certain aspects as recently as February 2024.
HMRC also continue to take a highly uncommercial interpretation of the mixed membership rules and deny access to double tax relief. The relevance of the mixed membership rules continues to be highly questionable given the increased effective tax rates since their implementation and numerous technical arguments as to why they are no longer needed on the statute book.
Both LLP and Ltd company structures have their pros and cons from a tax perspective, there is no one size fits all solution. Managers need to assess where they sit in their business life cycle and factor in short, medium and long term plans into their decision making.
Transfer Pricing / IME
With immediate effect the government has made amendments to provide certainty to taxpayers that have applied or want to apply to HMRC for advance pricing agreements (‘APAs’) in relation to financing arrangements (such as advance thin capitalisation agreements). The move seeks to close the gap that exists where the UK transfer pricing legislation is only in scope by virtue of section 161 or 162 TIOPA 2010, which apply in certain cases where persons act together in relation to financing arrangements. This measure will ensure the validity of APAs with businesses in such circumstances, in line with Statement of Practice 1 (2012) and will have effect for all chargeable periods from the introduction of TIOPA 2010.
In September HMRC released guidance on best practice approaches to transfer pricing to lower risk and avoid common mistakes, entitled: “Help with common risks in transfer pricing approaches — GfC7”. The HMRC guidelines are designed to provide clarity and transparency regarding compliance expectations. They are particularly relevant for businesses operating in the UK or with a presence in the UK, engaging in transactions that fall under UK transfer pricing legislation. The guidelines are structured to address the needs of different audiences, including risk leads, specialists, and in-house tax teams.
There were no further specific announcements on transfer pricing following a consultation last year in relation to the reform of UK legislation relating to transfer pricing, permanent establishments and Diverted Profits Tax. That consultation ended in August 2023 and HMRC/HMT have continued to engage with AIMA as to how best these should be developed. Of particular interest for asset managers would be a possible change to the investment management exemption (‘IME’). We are likely to see further developments in this area, with suggestion that the conditions may be relaxed to a degree as not to disadvantage certain managers that rely on being an agent of independent status.
It should also be noted that from April 2023, large multinational businesses operating in the UK have been required to keep and retain transfer pricing documentation in a prescribed and standardised format, set out in the OECD’s Transfer Pricing Guidelines (Master File and Local File). In practice this should only hit a minority of the asset management industry as the requirement aligns with the Country-by-Country Reporting (‘CbCR’) regime that applies to groups with a consolidated group revenue of more than €750 million. However, managers are increasingly restructuring their transfer pricing documentation in the new format to align with requirements in other jurisdictions. Regardless of size, best practice is that all asset managers should maintain and document an OECD compliant transfer pricing policy given the potential interaction with the IME and disguised investment management fee legislation.
OECD Pillar 2
With immediate effect the government announced minor but necessary amendments to the operation of top-up taxes implemented as part of the UK’s implementation of Pillar 2 to ensure that UK legislation remains consistent international standards.
The globally agreed G20-OECD Inclusive Framework Pillar 2 was implemented in the UK for accounting periods beginning on or after 31 December 2023 the government:
- Introduced an Income Inclusion Rule (‘IIR’) which will require large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15% ; and
- Introduced a supplementary Qualified Domestic Minimum Top-up Tax (‘QDMTT’) rule which will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%.
Both the IIR and QDMTT will incorporate the substance based income exclusion that formed part of the G20-OECD agreement. Additionally the government announced that existing legislation will be updated to incorporate the undertaxed profits rule and will be effective for accounting periods beginning on or after 31 December 2024.
The Pillar 2 rules represent a fundamental shift in global taxation aimed at international structures exploiting low tax jurisdictions with the UK expecting to raise an additional £2 billion per annum. The measure aligns with the CbCR regime, meaning most asset managers in the UK should not be impacted, however potential application to fund structures will need to be considered and any associated carve outs.
Making Tax Digital
The government is committed to delivering Making Tax Digital (‘MTD’) for income tax self assessment. The government will expand the rollout of MTD to those with incomes over £20,000 by the end of this Parliament, and will set out the precise timing for this at a future fiscal event.
Capital Allowances
No changes were announced in relation to the capital allowances rules other than the government reiterating its commitment to a competitive regime. As previously announced the full expensing rules that allow companies a 100% write-off on qualifying expenditure on most plant and machinery (excluding cars) and integral features / long life assets at a rate of 50% have been made permanent.
Research & Development
As part of its commitments in the roadmap, the Labour government promised to maintain the generosity of the rates for the merged R&D Expenditure Credit scheme and the Enhanced Support for R&D Intensive SMEs. HMRC will proceed with establishing the R&D expert advisory panel. It will continue to improve signposting and guidance on the R&D reliefs. It will also launch an R&D disclosure facility by the end of the year and use its powers to tackle agents who breach the agent standards.
The government has also committed to discussing widening the use of advance clearances in R&D reliefs with stakeholders, with the intention to consult on lead options in spring 2025. The aim of this is to reduce error and fraud, improve the customer experience, and provide certainty to businesses. The government will continue to consider longer term simplifications and incremental improvements to the effectiveness of the reliefs.
Crypto Asset Reporting
The government published the outcome and summary responses from the consultation relating to the implementation of the Crypto Asset Reporting Framework (CARF) and Common Reporting Standard (CRS) which closed in May 2024. More information is due to the published in the form of draft regulations and guidance. HMRC will work with stakeholders to ensure this covers the key questions they have raised and other queries that may arise. It was decided to extend the CARF to cover reporting on UK customers by UK businesses – this will be brought in at the same time as the implementation dates of the CARF. The government will continue to examine the issues raised regarding the benefits and drawbacks of extending CRS reporting to cover UK customers of UK businesses,
Offshore Anti-Avoidance Legislation
To modernise the rules and ensure they are fit for purpose following the removal of non-domicile status from 6 April 2025, the government has announced a review into the offshore anti-avoidance legislation relating to:
- The transfer of assets abroad (‘TOAA’);
- Settlements legislation; and
- CGT.
Tax advisors and industry representatives have highlighted a desire to modernise, simplify and clarify some of the rules that counter the use of personal tax offshore avoidance arrangements noting that they do not always provide clarity or certainty to taxpayers or HMRC.
An open call for evidence will run until 19 February 2025. Responses to this call for evidence will be used to inform areas which will be subject to a formal consultation in 2025. However it is not anticipated that any changes will be introduced before April 2026 – creating a potentially unhelpful transition period.
Pension Tax Limits
With no changes announced to the tax regime for pension contributions limits for 2024/25 and 2025/26 remain as:
- The Annual Allowance (‘AA’) is £60,000;
- Individuals who have ‘threshold income’ for a tax year of greater than £200,000 have their AA for that tax year restricted. It is reduced by £1 for every £2 of ‘adjusted income’ over £260,000, to a minimum AA of £10,000; and
- No Lifetime Allowance (‘LA’) charge.
As previously announced the LA of £1,073,100 will be abolished from 2024/25. Changes were made previously to clarify the taxation of lump sums and lump sum death benefits, and the application of protections, as well as the tax treatment for overseas pensions, transitional arrangements, and reporting requirements. From a practical perspective individuals should consider using their allowance before the 5th April deadline.
Individual Savings Accounts
Annual subscription limits will remain at £20,000 for Individual Savings Accounts (‘ISA’), £4,000 for Lifetime ISAs and £9,000 for Junior ISAs and Child Trust Funds until 5 April 2030. The government will not proceed with the British ISA due to mixed responses to the consultation launched in March 2024. Digital reporting for ISA managers will be mandatory from 6 April 2027. Draft legislation will be published for a technical consultation in 2025.
The starting rate for savings will be retained at £5,000 for 2025-26, allowing individuals with less than £17,570 in employment or pensions income to receive up to £5,000 of savings income tax free.
Inheritance Tax
In the Autumn 2024 budget, it was announced that the IHT nil rate band has been frozen at £325,000 since 2009 and this will now continue a further two years than previously, up to 5 April 2030. An additional nil rate band, called the ‘residence nil rate band’ is also frozen at the current £175,000 level for a further two years, until 5 April 2030.
The major change to IHT came in the announcement that most unused inherited pension funds and death benefits will now come into the scope of IHT and be included in the value of a person’s estate. This change will come into effect from 6 April 2027.
There will also be a reform to Agricultural Property Relief (‘APR’) and Business Property Relief (‘BPR’) from April 2026. Currently there is 100% relief on qualifying assets under either APR or BPR, however, this will now be capped to the first £1 million of combined agricultural and business assets, with a 50% relief thereafter. BPR will also be restricted to 50% in all circumstances for shares designated as “not listed” on the markets of a recognised stock exchange, such as AIM. These changes could have a fundamental impact on family owned businesses as they pass across generations.
As mentioned above, under the ‘Non-Domicile Changes’ heading, from 6 April 2025, there will be a new residence-based system for IHT, replacing the existing domicile-based system. This also results in the ending of the use of offshore trusts to shelter assets from IHT.
Electric Vehicles
To help drive the transition to electric vehicles (‘EVs’) the government is strengthening incentives to purchase EVs by widening the differentials in vehicle excise duty first year rates between EVs and hybrids or internal combustion engine cars. The government is also maintaining EV incentives in the company car tax (‘CCT’) regime and extending 100% first year allowances for zero emission cars and EV charge points for a further year.
The government is setting rates for CCT for 2028-2029 and 2029-30 to provide long term certainty for taxpayers and industry. Rates will continue to strongly incentivise the take-up of electric vehicles, while rates for hybrid vehicles will be increased to align more closely with rates for internal combustion engine (ICE) vehicles, to focus support on electric vehicles.
CCT rates for EVs going forward have been set as follows:
- 2025/26 BIK = 3%;
- 2026/27 BIK = 4%;
- 2027/28 BIK = 5%;
- 2028/29 BIK = 7%; and
- 2029/30 BIK = 9%.
VAT on Private Schools
From 1 January 2025 all education services and vocational training provided by a private school in the UK for a charge will be subject to VAT at the standard rate of 20%. This will also apply to boarding services provided by private schools.
To protect pupils with special educational needs that can only be met in a private school, local authorities and devolved governments that fund these places will be compensated for the VAT they are charged on those pupils’ fees.
Stamp Duty Land Tax (‘SDLT’)
From 31 October 2024 the higher rates for additional dwellings (‘HRAD’) surcharge on SDLT will be increased by 2 percentage points from 3% to 5%, above the standard residential rates of SDLT. The single rate of stamp duty charged when certain corporate bodies or ‘non-natural persons’ buy dwellings worth more than £500,000 will also increase from 15% to 17%. In addition to this, SDLT thresholds on residential property purchases are set to revert to the lower levels, £250,000 to £125,000, and from £425,000 to £300,000 for first-time buyers.
Liquidation of LLPs
The changes to tax rules on the liquidation of LLPs ensures that where a member of a LLP has contributed assets to the LLP, chargeable gains that accrue up to the contribution are charged to tax when the LLP is liquidated and the assets are disposed of to the member, or a person connected to them. The measure will have effect in relation to liquidations that commence on or after 30 October 2024.
The previous legislation provided that assets held by an LLP were treated as if held by its members in a normal partnership. Consequently, no chargeable gains accrued when a member contributed an asset to the LLP. The new legislation will deem that a disposal arises when a LLP is liquidated and assets a member has contributed are disposed of to the member, or to a company or other person connected to them. The amount of chargeable gain that is to accrue to the member is to be that amount equal to the amount that would have accrued at the time they contributed the asset to the LLP.