Corporate and Commercial

Katherine Zangana
November 2024

Rachel Reeves finally delivered the first budget of the new Labour Government on 30 October 2024. Following intense speculation beforehand (including our own!), industry commentators in the aftermath of the announcements were suggesting that the budget was not as dramatic as they had expected. Perhaps this was more down to the carefully thought-through campaign leading up to the announcements and an excellent presentation of the changes on the day.

Most commentators have, however, pointed out that these changes will mean that businesses and entrepreneurs will be paying more tax, in some cases as soon as today. Now that the dust has settled and further analysis has taken place, we can take a look at the key changes introduced and their implications for owner-managed businesses.

Capital Gains Tax (CGT)

Business owners considering selling their company will be very interested in any changes to CGT. These were keenly anticipated, and it was confirmed that these and the tax on carried interest will rise from April 2025.

With immediate effect, the rates of CGT increased from the current 10% (for basic rate taxpayers) and 20% (for higher and additional rate taxpayers) to 18% and 24% respectively. There are special provisions for contracts entered into before 30 October 2024 but completed after that date. Anti-forestalling rules were also introduced with immediate effect which can, in certain circumstances, apply to unconditional contracts entered into before 30 October 2024 which were not completed by then. The rates for selling second properties remain at 18% and 24% respectively.

The CGT rate for Business Asset Disposal Relief (BADR), which can apply to lifetime gains of £1m on certain disposals by employees and directors in their unlisted businesses, will continue. However, the tax rate will increase from the current 10% to 14% for disposals made on or after 6 April 2025, and from 14% to 18% for disposals made on or after 6 April 2026. It has been calculated that this will mean an increased bill of up to £80,000 for those planning to sell their businesses after April 2026.

Investors’ Relief (IR) provides for a lower rate of CGT to be paid on the disposal of ordinary shares in an unlisted trading company where certain criteria are met, previously subject to a lifetime limit of £10m of qualifying gains for an individual.

It is aimed at encouraging entrepreneurial investors to inject new capital investment into unquoted trading companies.

The CGT rate for IR, which applies in similar circumstances to BADR but where the investor is unconnected with the business, will increase in parallel with the BADR rates. Furthermore, the lifetime limit for this relief will also reduce from £10m to £1m for disposals made on or after 30 October 2024, significantly limiting its financial benefit going forward.

Carried interest changes

Carried interest refers to the performance-related rewards received by fund managers, primarily in the private equity industry. Previously, carried interest was taxed at lower capital gains tax rates, compared with income tax rates. The Budget changes included an increase in the CGT rate for all carried interest gains to a new flat rate of 32%, applying to carried interest arising on or after 6 April 2025. This is a temporary measure ahead of wider reforms that will apply from the following tax year. From 6 April 2026 a specific tax regime for carried interest will be introduced, moving it from the CGT framework to income tax. All carried interest will then be treated as trading profits and subject to Income Tax and National Insurance Contributions (NICs). However, the amount of ‘qualifying’ carried interest subject to tax will be adjusted by applying a multiplier resulting in an effective tax rate at 34.1% including NICs. Some might see this change as somewhat cosmetic, but it seeks to deal with some of the negative perceptions about carried interest representing remuneration rather than true capital gains.

These are all significant changes but, according to an analysis by Grant Thornton, this “still presents an attractive environment for management incentives and investors and is unlikely to discourage ongoing deal activity”. They “therefore expect the impact on M&A to be less severe than anticipated with the announcements ensuring the UK remains an attractive and internationally competitive environment for investors”.

Changes to Inheritance Tax (IHT)

While the CGT announcements were not as drastic as some had been speculating, the IHT reforms present a substantial shift in the tax landscape, especially for entrepreneurs and business owners. The changes introduced in the budget have particularly alarmed farmers and small business owners as from 6 April 2026, a 20% tax rate – half the headline inheritance tax rate of 40% – will be applied to the value of farms and businesses worth more than £1m when they are passed on.

The existing 100% business property relief and agricultural property relief will continue only for the first £1m of combined agricultural and business property after 6 April 2026. The rate of relief will be 50% thereafter, effectively making this a 20% IHT charge.

This presents a risk for family business owners as well as their companies, which will no doubt have to play a major part in funding any IHT that is due.

Changes to National Insurance contributions

From April 2025, employers’ NICs will increase from 13.8% to 15%. The threshold at which employer NICs become payable will fall from £9,100 to £5,000. To help mitigate these additional NICs costs for smaller employers, the employment allowance (which allows businesses whose annual NICs bill is less than £100,000 to reduce their NICs costs) will increase from £5,000 to £10,500 per year, and will apply to all businesses as the £100,000 threshold will be removed.

These changes present a challenging scene for our retailer and hospitality clients. The changes in NICs will be accompanied by increases to the National Minimum Wage and National Living Wage rates. This rising cost base will be particularly felt by people heavy businesses, perhaps making life on the high street even harder.