Navigating Labour's First Budget

The recent UK Budget, delivered by Chancellor Rachel Reeves, is set to reshape the fiscal landscape. The announced policies will see government spending increase by almost £70 billion a year over the next five years, equating to 2% of GDP. Half of this expenditure is expected to be funded by a £32 billion a year increase in borrowing (1% of GDP) and the other half by tax increases aimed largely at businesses and wealthy individuals. These figures make this budget one of the largest fiscal loosening events in recent decades.

Reeves aims to “fix the country’s broken finances and public services”. However, despite the hefty fiscal measures, the medium-term impact on the economy may be more muted than expected. Below, we outline the likely economic effects and provide a breakdown of key tax changes that could affect our clients.

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ECONOMIC IMPACT: MODEST GROWTH, HIGHER BORROWING

In the Chancellor’s first major fiscal announcement, the budget reflects Labour’s resolve to elevate public spending, with an additional £100 billion allocated to infrastructure and essential services over the parliament. This increase in spending is balanced by tax hikes and a rise in borrowing, with net debt expected to grow significantly. Market reactions have been cautious; the FTSE 100 dipped, and government borrowing costs rose, with the 10-year gilt yield climbing as investors weighed the implications of increased debt.

The Office for Budget Responsibility (OBR) revised its economic forecasts modestly, predicting growth to average 1.75% per year from 2025 to 2029. Yet, the OBR remains cautious, downgrading growth expectations for 2029, likely an election year, to 1.6%. Notably, the OBR inflation forecast for 2025 has risen materially from 1.5% to 2.6% and inflation forecasts for subsequent years have also risen. We would question these inflation forecasts, especially given the most recent inflation data, which came in significantly below the Bank of England’s target.

The investment team at Hundle remains cautiously optimistic about the economic outlook, anticipating that growth in the short term (2025 and 2026) may slightly outperform the OBR’s forecasts, particularly if inflationary pressures continue to ease. With additional borrowing averaging £28 billion a year through this parliament, there is hope that some of this new capital will stimulate near-term growth; however, businesses and families may face challenging conditions if this results in increased borrowing costs and a resurgence of inflation.

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TAX IMPLICATIONS FOR CLIENTS AND BUSINESSES

For clients, the 2024 Budget introduces significant tax changes that demand careful planning. Below, we highlight the critical points and how they could impact wealth management strategies.

CAPITAL GAINS TAX

The increase in Capital Gains Tax was one of the most hotly anticipated changes with large amounts of speculation and press coverage in the run-up. Thankfully, a more measured approach was taken than some of the rumours anticipated. Effective from 30th October 2024, CGT has risen from 10% to 18% and from 20% to 24% for lower and higher CGT rates.

For entrepreneurs and investors, the changes to Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs Relief, and Investors Relief (IR) could be particularly impactful. BADR and IR rates will increase to 14% from April 2025 and to 18% from April 2026, while the IR lifetime limit will be reduced to £1 million, aligning with BADR. For clients relying on these reliefs, early tax planning will be essential to manage future liabilities and thought may be given to accelerating disposals prior to the rate increases, where possible.

VAT ON PRIVATE SCHOOL FEES

In a move affecting many of our clients, VAT will now be charged on private school tuition and boarding services at the standard rate of 20%, effective from January 2025. This tax will also apply to any prepayments made from 29 July 2024 for services commencing in 2025. Families will need to account for this additional cost as part of their education planning.

CHANGES TO NON-DOM REGIME

The abolition of the non-domicile (non-dom) regime, effective from April 2025, represents a seismic shift. A detailed Technical Note was released on 30th October, which requires thorough analysis. The current snapshot is as follows:

• Inheritance Tax and Non-UK Trusts: Disappointingly, despite the feedback on the initial proposals, Reeves has retained the punitive proposals relating to Trusts holding non-UK assets. If the settlor is deemed ‘long-term’ UK resident (broadly, UK tax resident for at least 10 of the previous 20 tax years), such assets will be within the scope of IHT.
• Foreign Income & Gains Regime: Individuals newly resident in the UK (defined as having not been UK tax resident in any of the prior 10 tax years) will be able to opt into the Foreign Income and Gains (FIG) Regime, which will mean for the first four tax years of UK residence their foreign income and gains will not suffer UK tax.
• CGT: For CGT purposes, current and past remittance basis users will be able to rebase personally held foreign assets to 5 April 2017 on a disposal where certain conditions are met.
• Overseas Workday Relief: Overseas Workday Relief will be retained and reformed, broadly, extending relief to a four year period and removing the need to keep the income offshore.
• Temporary Repatriation Facility (TPF): This applies to individuals who have previously claimed the remittance basis of taxation. They will be able to access the TPF enabling them to designate foreign income and gains that have arisen prior to 6 April 2025 and remit them to the UK from 6 April 2025 at a reduced rate. The main change here is that the TPF has been extended to a three year period.

NATIONAL INSURANCE CONTRIBUTIONS (NIC) FOR EMPLOYERS

Employer NICs will increase from 13.8% to 15% from April 2025, with the contribution threshold dropping from £9,100 to £5,000. This measure, aimed at raising £25 billion annually by 2030, is expected to impact the hiring landscape. Smaller businesses will be shielded, but larger employers may consider alternative strategies to manage rising employment costs with a potentially increasing demand for salary sacrifice schemes with a view to reducing the NIC burden.

PENSIONS AND INHERITANCE TAX

Pension planning will face new complexities with the return of unused pension funds and death benefits falling within individuals’ taxable estates for IHT purposes. From April 2027, these assets will face up to 40% IHT, a change that reverses favourable tax treatment introduced in 2015. This underscores the need for strategic retirement planning to mitigate the tax erosion of hard earned savings.

CHANGES TO INHERITANCE TAX RELIEF ON BUSINESS PROPERTY

The longstanding Business Property Relief (BPR) for IHT will be limited from April 2026. Only the first £1 million of qualifying assets will be benefit from 100% relief from IHT, with any excess eligible for only 50% relief. Clients with significant business assets may need to reassess ownership structures to optimise tax efficiency.

ADJUSTMENTS TO CARRIED INTEREST TAXATION

For those in private equity, Labour’s Budget introduces a gradual shift in the treatment of carried interest. From April 2025, CGT on carried interest will rise to 32%, with a full shift into the income tax framework planned for April 2026. This is a potentially significant change for non-UK tax resident carried interest holders – the move to the income tax framework (whereby carried interest is treated akin to trading income) would mean non-UK tax residents would suffer UK Income tax on such amounts.

STAMP DUTY LAND TAX AND PROPERTY PURCHASES

Property purchasers face an SDLT increase on second homes from 3% to 5% as of 31 October 2024. Additionally, corporate buyers of properties valued over £500,000 will see the SDLT rate rise from 15% to 17%, adding another consideration to property investment strategies.

RELIEFS FOR INVESTORS IN EIS AND FILM TAX CREDITS

Amidst the tax rises, there are some positives for investors. The Budget confirmed the Enterprise Investment Scheme (EIS) will remain in place until at least 2035, offering continuity for those looking to invest in early-stage businesses.

Additionally, enhanced tax reliefs under the Audio-Visual Expenditure Credit (AVEC) scheme will come into effect from April 2025, benefiting film and high-end TV productions. For smaller productions, the new Independent Film Tax Credit will offer a higher 53% rate for UK-based productions, supporting the creative industries.

PRIVATE JETS

Air Passenger Duty rates for 2026-27 for larger private jets (broadly, those with minimum weight of 20 tonnes or more equipped to carry fewer than 19 passengers) will rise a further 50%. The government is consulting on extending the scope to all passengers travelling in private jets.

TAX AVOIDANCE AND COMPLIANCE

Various announcements were made pertaining to the increased focus on non-UK entities and greater investment into HMRC. There will also be several consultations relating to tackling promoters of marketed tax avoidance and certain anti-avoidance rules themselves.

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WHY WE REMAIN POSITIVE ON UK EQUITIES

Despite the shifting economic and tax landscape, Hundle’s investment team remains optimistic about the UK’s investment potential. Faced with ongoing global market volatility, we view UK equities favourably, particularly given their attractive valuations relative to global peers, most notably the US.

US large-cap equities currently trade at historically high multiples, whereas UK companies—especially in sectors like financials, energy, and industrials—present compelling value. These sectors offer strong dividend yields, enhancing return potential for investors seeking reliable income streams. Additionally, the UK market’s sensitivity to global growth, combined with a stable regulatory environment, strengthens its appeal to value-driven investors. This valuation gap offers a unique opportunity to capitalise on quality assets that remain undervalued compared to their US counterparts, making UK equities a strategic choice for those looking to diversify and capture growth potential.

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CONCLUSION

Chancellor Reeves’ Budget, framed as a response to the need for greater fiscal stability and robust public services, represents a new era in UK tax policy with significant consequences for businesses and the wealthy. For high-net-worth individuals, the changes highlight the importance of proactive tax planning to mitigate the effects of increased CGT and IHT. This may increase the attractiveness and use of asset holding wrappers, such as offshore bonds, unit trusts and wider asset holding structures.

At Hundle, we are prepared to support our clients in adapting their wealth management strategies to these new fiscal realities, ensuring their assets are well-positioned within the evolving tax landscape.

Importantly, despite the Budget’s substantial tax increases, we maintain a positive stance on the UK from an investment perspective. With attractive valuations and opportunities for dividend income, UK equities continue to present compelling opportunities for long-term growth, especially relative to US markets. As always, we encourage our clients to consult with our Wealth Structuring and Investment teams to discuss these changes and explore the best path forward in managing and growing their wealth amidst the new fiscal landscape.