Understanding the October 2024 Budget: What it Means for Investors
On October 30th, 2024, the Chancellor unveiled the Autumn Budget, outlining the UK’s financial strategy for the year ahead. Among the key proposals were several adjustments that could significantly impact investors. From changes in taxes on capital gains and income to new policies surrounding inheritance, this budget is a pivotal moment for strategic financial planning.
In this post, we will dive into the main changes affecting investors, touch on other important budget points, and provide insights on how to navigate the evolving tax environment.
Key Changes for Investors in the October 2024 Budget
The October Budget introduces several significant tax changes for investors, including increases to capital gains tax (CGT), income tax freezes, and adjustments to inheritance tax (IHT). These shifts emphasize the need for proactive financial planning in a higher-tax landscape.
Capital Gains Tax Adjustments
The Budget increases the capital gains tax rates, which will take effect from October 30, 2024. The new rates are 18% for basic-rate taxpayers and 24% for higher-rate taxpayers, up from 10% and 20%, respectively. However, the tax rate for residential property remains unchanged, providing some relief for landlords.
In addition, the rate for Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, will rise to 14% in April 2025 and then to 18% in April 2026. Notably, the lifetime limit for BADR remains at £1,000,000, but the cap for Investors’ Relief has been drastically reduced, from £10,000,000 to £1,000,000— a significant 90% cut.
Income Tax and Fiscal Drag
Although the Chancellor chose not to directly raise income tax rates, the freezing of personal income tax allowances will act as a “stealth tax.” As wages increase due to inflation, more individuals will be pushed into higher tax brackets, resulting in lower disposable income for many investors.
Additionally, the tax rate on carried interest for fund managers will rise to 32% from 6% starting April 2025, with further reforms set to increase the tax rate to 34.075% in 2026. This will likely affect the net returns for those in the investment management sector.
Inheritance Tax (IHT) Changes
The IHT threshold remains frozen at £325,000 until 2030. For individuals, the residential nil-rate band can add an additional £175,000, allowing for a total tax-free allowance of £500,000, or £1 million for couples. With property values rising, more estates will be liable for IHT, making estate planning even more important.
From April 2026, business and agricultural property reliefs will see changes, maintaining 100% relief on the first £1 million but reducing relief to 50% on amounts exceeding this threshold. Furthermore, the government will cut business property relief to 50% for shares in unlisted companies.
Starting in April 2027, pensions will no longer be exempt from IHT if the individual passes away at or after the age of 75. Withdrawals by beneficiaries will be subject to income tax, potentially reaching rates as high as 67%.
Other Notable Budget Highlights
While the changes directly affecting investors are significant, there were also other key areas addressed in the October Budget:
- Increased NHS and Education Funding: The government has committed to substantial increases in funding for healthcare and education. While this is positive news, it could lead to further tax hikes in the future to maintain these services.
- National Wealth Fund: The Budget announced a £70 billion National Wealth Fund aimed at boosting infrastructure and economic growth. This fund will focus on transformative industries like green energy, with particular emphasis on gigafactories and green hydrogen.
- Support for Research and Development (R&D): The government unveiled new incentives for businesses engaged in technology and sustainability sectors. These incentives aim to drive innovation and open up lucrative investment opportunities, particularly for those interested in cutting-edge industries.
Strategic Investment Planning in a High-Tax Environment
The October 2024 Budget reflects a clear trend toward higher taxes, meaning investors need to rethink their strategies. As taxes increase, it becomes more important than ever to optimize your investment approach to minimize the impact on your returns.
The Enterprise Investment Scheme (EIS)
One investment vehicle that stands out in a higher-tax environment is the Enterprise Investment Scheme (EIS). The EIS offers several tax advantages, including 30% upfront income tax relief, CGT-free growth, and the ability to defer capital gains tax. Given the tax hikes introduced in the budget, EIS presents a strategic opportunity for investors to reduce their tax liabilities while supporting British startups.
With CGT-free growth and the potential to defer taxes, EIS becomes an increasingly attractive option in this new fiscal landscape. Additionally, as more investors look to manage their portfolios in a higher-tax world, the demand for EIS investments could help fuel the growth of innovative businesses in the UK.
Proactive Financial Strategy
The key to managing the changes introduced by the Budget is proactive financial planning. By incorporating tax-efficient strategies like EIS, investors can maximize returns while minimizing the impact of tax increases. Moreover, considering tax-saving opportunities across various asset classes will help you stay ahead in an environment of rising taxes.
Final Thoughts
The October 2024 Budget introduces a series of changes that will significantly impact investors, particularly those affected by the rise in capital gains tax, income tax freezes, and inheritance tax adjustments. With strategic planning and tax-efficient investments like EIS, you can navigate these changes and ensure your portfolio remains optimized for growth in a higher-tax world.
As we move into 2025, staying informed and adapting to the evolving tax environment will be crucial for securing your financial future and maximizing the potential of your investments.
