Last week, we hosted Gravita’s Budget webinar where we shared insights from the first Labour Budget, focusing on key areas of interest including succession planning, replacement of the non-dom regime, exit strategies, and inheritance. For those with business interests, shares, or property assets, the evolving landscape has introduced significant complexity. Additionally for those who are planning to come over to the UK, there are a number of opportunities to consider. We covered what has changed, what these changes mean for businesses and individuals, and practical steps to consider for future business and tax planning. We caught up with two of our Tax Partners, Tom Adcock and Ian Timms.
What are the areas in the Budget that most surprised you?
Ian highlighted that changes in business tax relief, particularly the £1 million cap on the assets Agricultural Property Relief applies to, will create challenges for sectors like farming, which depend on these reliefs. Tom pointed to the increase in National Insurance (NI) contributions and the reduced employer contribution threshold as particularly challenging. Coupled with a rise in the minimum wage and labour law changes, these shifts will make it harder for sectors like hospitality to manage costs effectively. The abruptness of these changes is seen as a major strain on businesses trying to adapt.
Where next for business confidence and long-term planning?
Businesses should take a longer term, strategic view in their planning, especially for succession and exit strategies. Many business owners are exploring Employee Ownership Trusts (EOTs), as they offer a tax-free way to transfer ownership to employees, supporting a gradual and tax-efficient transition. Although the government suggested many of these changes won’t take effect immediately, beginning the planning process now can help businesses adjust and benefit from current reliefs while they last.
Are people considering moving abroad as a tax strategy, and for how long?
A growing number of business owners are considering relocating overseas to reduce their UK tax burden. To gain the tax benefits of living abroad, UK residents need to stay overseas for at least five years.
Ian Timms: “The UK doesn’t have an exit tax charge for individuals. I’m seeing a lot of people think: ‘I’ll move abroad to a certain tax jurisdiction, then sell and then I won’t have to pay all these tax liabilities.’ We have pretty strict rules on that, and you’ve got to leave for at least five years, otherwise when you come back in, there’s a problem. This is a long-term strategy. But we’re in an international, mobile world.”
What are the options if you don’t want to move abroad?
For those staying in the UK, succession and exit planning have become increasingly relevant as Capital Gains Tax (CGT) rates rise. Business owners considering selling parts of their business or transferring ownership to the next generation may find it advantageous to act before April, securing the lower current tax rates. EOTs offer a route to pass ownership to employees without CGT, using a model similar to John Lewis, which keeps the business within a trusted circle while promoting employee involvement.
Could share schemes be used to incentivise a broader team?
For growing businesses looking to motivate and retain employees, Enterprise Management Incentive (EMI) schemes are popular. By using these schemes, business owners can offer shares as part of the compensation package, aligning employee interests with the company’s long-term success. EMI schemes are valued for their tax efficiency and are widely adopted by businesses aiming to reward and keep their key staff engaged.
Thomas Adcock: “The use of EMI schemes coupled with growth shares and dynamic reward packages can incentivise people in your business. That’s quite a common thing to do. And it does work, a lot of businesses are doing it. Because it’s effective.”
What are the key changes to Inheritance Tax (IHT) in the Budget?
The Budget has frozen IHT thresholds, which means more people will face higher tax liabilities as their asset values increase. Pensions, which will now be subject to IHT, add another layer to the tax planning challenge, particularly for those with significant retirement funds. For individuals with assets exceeding £2 million, combined IHT and income tax rates can tax pensions you’ve left behind at a rate between 67% and 90% in some areas, underscoring the need for careful estate planning to pass wealth efficiently to future generations.
Ian Timms: “We worked on some cases where the marginal tax rate is 88%. If you went to Scotland, it’s over 90%. Now that needs pretty big planning.”
How will the changes to Business Property Relief (BPR) and Agricultural Property Relief (APR) affect business owners?
The new £1 million cap on Business Property Relief (BPR) and Agricultural Property Relief (APR) will impact those with high-value assets, especially in the agricultural sector, where land values often exceed this threshold. Assets above £1 million will be subject to a 20% tax rate from April 2026, which presents a financial challenge for farmers and landowners who intend to keep businesses within the family. The new limitations make succession planning more difficult, as owners face high tax liabilities to transfer assets to the next generation while still keeping their family business intact.
Thomas Adcock: “You are seeing a number of farmers marching on Whitehall to protest against this. It’s also why you might have also seen a famous farmer that has an Amazon series being very vocal about this on social media. And probably quite rightly.”
What changes are being made to the rules for non-domiciled individuals (non-doms)?
The Budget announced that non-dom tax reliefs would be abolished by April 2025 and replaced by a residents-based system. The rules are complex but we’ve provided a summary of all the changes here.
What are the levers that businesses can take to ease the pressures of increased Employer’s NI?
Businesses, particularly those in low-margin sectors like hospitality, retail, and hairdressing, are facing significant financial pressures due to rising costs, including increased Employers’ National Insurance (NI) contributions. To address these challenges, businesses may need to consider several cost-cutting measures. One option is to reduce headcount, though this is often difficult in industries requiring high levels of staffing. Alternatively, businesses can assess how much they can pass on to customers through price increases, though this too has limitations.
To reduce the financial impact, businesses can consider strategies like salary sacrifice schemes, where employees exchange part of their salary for benefits like pension contributions, cycle-to-work scheme and childcare vouchers which can reduce both employees’ and employers’ tax liabilities. Other measures include exploring apprenticeships or capital investment in machinery and technology, though the upfront costs may be prohibitive for smaller businesses. Outsourcing certain services, or hiring overseas workers not subject to UK taxes, may also be considered, but this brings its own complications, especially when social security laws vary by country.
Thomas Adcock: “I’m sure every business is looking again at their budget for the next 12 to 18 months and asking themselves how they can deal with the hike in Employers’ National Insurance. This will be a very difficult time for businesses that have low margins with high numbers of diverse salaries, such as the hospitality sector, where it’s obvious these changes are going to hit hardest.”
What are the pros and cons of Limited Companies versus LLPs in the current tax environment?
With the changes to Employers’ National Insurance some businesses may be persuaded to change their structure to that of a Limited Liability Partnership (LLP) because partners in LLPs do not pay Employers’ National Insurance. However, beware there are strict legal and tax rules that must be adhered to for this to be effective. Hybrid structures, where an LLP owns a company, also offer flexibility, allowing business owners to benefit from the advantages of both arrangements. This structure is also useful for succession planning, enabling smooth transitions when partners join or leave the business.
What is the impact of changes to corporation tax and transfer pricing?
The government’s recent release of a corporation tax roadmap indicates that the corporation tax rate of 25% is expected to remain in place, which is relatively competitive compared to other countries. However, the effective tax rate for many businesses may be different due to various reliefs and deductions available. Businesses with complex international structures may need to navigate transfer pricing rules, which prevent profits from being artificially shifted to low-tax jurisdictions. These rules are expected to apply to more businesses, as the threshold for compliance may fall from £750 million in turnover to as little as £50 million. This change could mean that many more small and mid-sized businesses with international operations will be required to comply with transfer pricing rules, which could increase costs due to the need for more extensive documentation and reporting. The shift in these rules aligns the UK more closely with global standards, but it presents a new challenge for many businesses, particularly those that were previously below the threshold.
As always, if you have any questions about how Gravita can support your business or the people around it, please do get in contact today.
