In the Autumn Budget announcement on 30 October 2024, Chancellor Rachel Reeves announced several changes to capital gains tax and inheritance tax which will impact on trusts and estates.
Capital gains tax (CGT)
New rates will come into effect for any disposals made on or after 30 October 2024.
For disposals on or before 29 October 2024, higher rate taxpayers, personal representatives of estates and trustees of trusts paid tax on any gains (after deduction of costs and allowances/exemptions) at a rate of 20% for gains on other chargeable assets and 24% on gains from the sale of residential property.
From 30 October 2024, all gains realised by higher rate taxpayers, personal representatives and trustees (regardless of asset type) will be taxed at 24%.
For lower rate taxpayers, the previous tax rates were 10% (other assets) and 18% (residential property). All gains for lower rate taxpayers will now be taxed at 18%.
Inheritance tax (IHT)
Currently, the general rule is that IHT is payable at a rate of 40% on assets over £325,000. There are various additional allowances and exemptions that may apply, depending on the circumstances. The £325,000 threshold has been in place since 6 April 2009 and was frozen by the previous government until 2028.
The freeze on the £325,000 threshold will be extended to 2030.
Inherited pensions had previously been exempt from IHT. From 2027, unused pension death benefits will be brought into account for calculating IHT.
Changes to the IHT reliefs available for business and agricultural property were also announced. The reliefs will be capped at £1million, with 50% relief on business and agricultural property valued over £1million (effectively, a 20% rate of tax).
Domicile and residence
The current domicile-based system will be replaced with a residence-based system from 6 April 2025.
This means domicile will no longer be relevant for assessing whether non-UK assets in deceased estates are liable to IHT. The test for whether assets are in scope will be based on long-term UK residence.
These changes will also impact on trusts. Previously, a trust’s domicile status was based on the settlor’s domicile at the time of making the settlement. From 6 April 2025, trusts will be in scope for IHT during the time the settlor is long-term resident. For relevant property trusts and qualifying interest in possession trusts, special rules will apply.
Significance for executors and trustees
In 2021 to 2022 HM Revenue and Customs received 222,800 IHT accounts for estates, and of those 222,800 accounts, 27,800 were due to pay tax (12%)[1]. The estates that were taxable accounted for 4.39% of UK deaths, with the total IHT paid to HMRC during 2021-2022 being £5.99 billion.
The new rules will bring more estates into the IHT regime and will increase IHT receipts. The changes will, in some cases, bring added complexity for personal representatives in estates involving businesses, agricultural assets, and overseas aspects. It seems likely there will be an increase in estates where personal representatives and beneficiaries find that estate assets need to be sold to pay IHT.
Individuals, personal representatives and trustees will need to change their approach to tax planning, taking account of the new rules. For those with existing tax planning arrangements in place who may be impacted by the changes, specialist advice should be taken to ensure any adjustments that should be made are implemented as soon as possible.
