A New Era: Rachel Reeves Delivers the First Labour Budget in 14 Years

Chancellor Rachel Reeves yesterday delivered the first Labour Budget for 14 years, and the first for a female Chancellor, to the House of Commons. The Budget arrived after months of warnings that it would – in the words of the Prime Minister – be ‘painful’, made up of “difficult decisions” in relation to spending, taxation and the calculation of the nation’s debt. The months of uncertainty and speculation are over; the UK now has a clearer path forward.

Certain measures which had been rumoured in the build-up to the Budget were confirmed, such as the increase to Employer National Insurance and the increase to Capital Gains Tax (CGT). Others were not, such as the announcement that the Income Tax and Employee National Insurance thresholds will rise in line with inflation from April 2028. In addition, the Chancellor also provided detail around the cancellation of the UK Resident Non-Domiciled Regime and the new UK Residence based regime.

The key points are summarised below:

UK Resident Non Domiciled (UK RND) tax regime¹

Chancellor Rachel Reeves confirmed that the proposed cancellation of the UK RND regime (announced by the Conservatives at the Spring Statement) would proceed, and a new technical note combined with draft legislation was released containing more detail on the proposals to come into effect from 6^th April 2025.

These proposed rules are summarised below. A fuller briefing will be released by us containing the detail of both the technical note and the draft legislation.

At a glance, Labour have confirmed that:

• They will replace the current UK RND regime with a 4 year residence based regime for individuals who have not been resident in the UK for 10 consecutive years prior to their arrival;
  
• Under the 4 year regime there will be 100% tax relief on all qualifying new Foreign Income and Gains (FIG) received by the new arrivals to the UK;
• More detail around what will qualify as FIG in this period has been provided, and typically includes non-UK situs assets;
• A Temporary Repatriation Facility (TRF) will be offered to eligible individuals, who were taxed under the remittance basis, for 3 years from 6^th April 2025. Under the TRF designated amounts will be charged to UK tax as follows:

o 2025/26 – 12%

o 2026/27 – 12%

o 2027/28 – 15%

• For the TRF it is understood that there will be no requirement to remit to the UK in order to claim; it will be on a designation basis and will include illiquid assets;
• The TRF will be available for distributions from offshore trusts to UK resident individuals during the same time period;
• For CGT purposes, eligible individuals who claimed the remittance basis, will be able to, on an asset by asset basis, rebase certain assets to 5^th April 2017. Crucially, this is understood to not be available to any individual who was UK Domiciled or Deemed Domiciled before 6^th April 2025.
• For Inheritance Tax (IHT) purposes, from 6^th April 2025, an individual will be within the scope of IHT once they have been in the UK for at least 10 out of the last 20 tax years (known as “long-term resident”);
• A “tail” for IHT purposes will be applied when an individual within the scope of IHT leaves the UK. The new rules propose:

o For individuals resident between 10 and 13 years, they will remain in scope for 3 years following an exit from the UK;

o This then increases by one tax year for each additional year of residence, so 15 out of 20 would be in scope for 5 years and if resident for 17 out of 20 would be in scope for 7 years;

o For long term residents, they will be in scope for 10 years after leaving the UK.

• Offshore trusts will be in scope for IHT for long term resident settlors regardless of when settled.

It should be noted that some concessions to the taxation of overseas trusts for IHT purposes have been announced, which should relate to trusts established before 30^th October 2024. More detail on these concessions will be contained in our more detailed note.

Inheritance Tax

In addition, Rachel Reeves announced changes to Inheritance Tax (IHT). Despite speculation in the media that there could be fundamental reforms to IHT, there were instead more measured changes to existing reliefs, which appear to be designed to achieve the policy objective of bringing forward the point at which businesses and agricultural land are inherited by the next generation. 

• The nil-rate band will remain at £325,000 and the residence nil-rate band will continue at £175,000. The Chancellor confirmed that these rates will remain fixed until at least 5^th April 2030.2
• From 6 April 2026, reforms to both Agricultural Property Relief (APR) and Business Property Relief (BPR) will be introduced⁴ with a new £1 million allowance being applied to the combined value of property in an estate qualifying for 100% relief from BPR and APR.
• To the extent that the value of the qualifying assets exceeds £1 million, the assets will only qualify for 50% relief resulting in an effective rate of IHT of 20%. The new provisions will apply to Potentially Exempt Transfers (PET) made from 30^th October 2024 where the donor dies after 6^th April 2026. Where settlors have set up more than one trust prior to 30^th October 2024, each trust will benefit from the £1 million allowance³.
  
• The government will reduce the rate of BPR available from 100% to 50% in all circumstances for shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM.
  
• Unused pension funds and death benefits payable from a pension will form part of an individual’s estate for IHT purposes from 6^th April 2027.
  

Capital Gains Tax (CGT) and Carried Interest

Contrary to popular pre-budget speculation, the Autumn Budget has not aligned CGT rates with Income Tax rates. There have however been some changes to both the headline rates of CGT and the taxation of Carried Interest received by fund management executives.

Capital Gains Tax

For both higher rate taxpayers and trustees, from 30^th October 2024 the rate of CGT that will apply to gains realised on the disposal of assets, other than residential property and Carried Interest, will be increased from 20% to 24%.⁴

Furthermore, from 6 April 2025 the rate of CGT applying to the disposal of shares in trading businesses that qualify for Business Asset Disposal Relief (BADR) and/or Investors’ Relief will increase from 10% to 14%. The applicable rate will further increase to 18% from 6^th April 2026. The rate of CGT applying on gains realised on the disposal of residential property will remain unchanged from 24%.

The government have confirmed that anti-forestalling rules will be introduced to limit the efficacy of unconditional but uncompleted contracts entered into before 30^th October 2024. Where these provisions apply any gain realised on disposal will be subject to the new rates of CGT. These provisions may also apply where an election is made to disapply the share reorganisation provisions for the purposes of claiming BADR or Investors’ Relief.

Carried Interest

The Autumn Budget has not fundamentally reformed the taxation of Carried Interest, with legislation being introduced to increase the rate of CGT that applies to distributions realised from 6^th April 2025 from 18%/28% to 32%.

It is important to note that from 6^th April 2026 further reforms will apply with Carried Interest distributions being taxed fully within the Income Tax framework and treated as trading profits subject to Income Tax and class 4 National Insurance Contributions. The amount of ‘Qualifying’ Carried Interest subject to tax will be adjusted by applying a 72.5% multiplier.² Further detail will be provided in due course by the Government on the definition of ‘Qualifying’ Carried Interest. 

The Income Based Carried Interest (IBCI) rules will be amended to remove the exclusion for employment-related securities and will therefore apply to distributions received by both partners and employees.

A summary of the existing Carried Interest provisions can be found here - https://privatebank.jpmorgan.com/eur/en/insights/wealth-planning/the-future-of-tax-in-the-uk-carried-interest

Stamp Duty Land Tax

It had been anticipated that the Chancellor would make changes to Stamp Duty Land Tax (SDLT) on the purchase of residential property for non-UK residents⁵. While a rate increase of 1% was reported in the government’s manifesto, it was announced today that Higher Rates for Additional Dwellings on SDLT on the purchases of second homes, buy-to-let residential properties, and companies purchasing residential property will increase by 2% to 5% from 31^st October 2024².

This surcharge is also paid by non-UK residents purchasing additional property. Non-UK residents also pay the non-resident’s SDLT surcharge of 2%. This will mean a non-resident individual buying an additional UK property will pay 19% on the value of property over £1.5m.

The single rate of SDLT that is charged on the purchase of dwellings costing more than £500,000 by corporate bodies will also be increased by 2 percentage points from 15% to 17%.²

Other measures at a glance

• Employers National Insurance will rise by 1.2% to 15% from 6^th April 2025, representing the main tax raising measure of the Chancellor;
  
• The subscription limits for Adult ISAs, Junior ISAs and Child Trust Funds will be maintained until April 2030;
• The rate of the Energy Profits Levy will increase from 35% to 38% and be extended until 31^st March 2030;
• The government will not extend the freeze to Income Tax and National Insurance Contributions thresholds. From April 2028 these will rise in line with inflation;
• The Fuel Duty freeze will be extended for a further 12 months;
• Commitment to maintain the cap on Corporation tax at 25%;
• Air Passenger Duty will be adjusted to account for below inflation up-rating, with a further 50% increase for larger private jets from 6^th April 2026;
• 20% VAT on education and boarding school services will be introduced from 1 January 2025 (apply to pre-paid fees from 29^th July 2024).

What the Market is telling us

Markets couldn’t make their mind up on what they thought about the Budget. The initial response was a positive one. Gilts held their gains from earlier in the day. The pound rose as much as 1% against the dollar to move back above 1.30. The domestically-oriented FTSE 250 index rallied close to 2%. And AIM stocks (typically smaller and higher growth in nature) were up as much as 4%. But by the end of the day, most of those moves had reversed.

Initial optimism suggested a job-well-done by the Chancellor. The market took comfort from the Labour government’s commitment to its fiscal responsibility and boost growth. Spending had been increased by a huge £60-70bn, but that was taken well as it had been funded by both significant tax increases as well as changes to the government’s measure of debt under its fiscal rules (to account for the value of assets that they invest in).