The Autumn Budget: A legal perspective for business – London Business News | Londonlovesbusiness.com

The first budget by a Labour Chancellor in 14 years has had many businesses worried for some months.  And those worries appear justified.

As many predicted, the increased tax burden is falling on employers.

This gives you an overview of the issues and concerns.

National Insurance

The 1.2% increase in the rate of employers’ national insurance is the change that immediately stings our clients the most.

It is going to be challenging for many businesses, particularly those where payroll costs represent a comparatively disproportionate percentage of total costs.

Those responsible for managing costs within every UK SME business today will be frantically looking how other costs can be reduced to pay for this, or they will need to consider increasing their prices. If the latter happens it will of course cause inflation.  I can also see many companies having to postpone well deserved pay-rises for their workers.

CGT

This was one of the most hotly debated subjects in the press with much speculation about how much Capital Gains Tax rates would rise and the impact of that on entrepreneurship.  In reality the changes announced were more modest than feared. Currently we have Capital Gains Tax rates of 18%/24% on residential property and 10%/20% on all other taxable gains.

Historically, Entrepreneurs Relief provided up to £10m of gains to be taxed at 10% on the disposal of business to help encourage entrepreneurship and this was reduced to £1m with the change to Business Asset Disposal Relief. The Chancellor announced changes to this relief to bring the rate of tax charged to 14% from April 2025 and to 18% from April 2026/27.

This will affect those looking to sell their businesses over the next few years and might, potentially, encourage some earlier handing down of businesses in the shorter-term. It is certainly something you need to consider if you’re looking to sell your business in the near future and the tax savings will be substantial for those with large gains.

Inheritance Tax

Inheritance tax has a big impact on the wealth that can pass down the generations. However, governments have historically understood that there is a need to pass down businesses to the next generation without them being stymied by tax.

The Government achieved this with the Business Property Relief which offered a 100% inheritance tax relief on business assets that had been held for at least two years. The difficulty for the Government is that this very valuable relief has been used far more widely than was contemplated at the outset.  It was intended for use with family businesses but the existence of such a valuable relief has seen its use for general financial investment in structured investments in a way that was not considered when it was introduced.  Unfortunately, the use of this relief so widely, to anyone with certain investments, meant that it was only a matter of time before the Government acted to limit it.

The changes announced will see Business Property Relief at the 100% rate restricted to only £1m. The assets in excess of that value being relieved at 50% (an effective rate of 20%).

Whilst this will be unlikely to affect smaller businesses (and, perhaps surprisingly, not the majority looking to use Business Property Relief for investment-based estate planning), this will potentially have a very large knock-on effect on larger businesses with limited cash flow.

We are yet to see how this may be implemented but those with notable capital in business assets may need to take some prompt advice on the impact on them and their estate planning. For example, for a manufacturing business with a property of £2m and cash of £200,000 there is currently no IHT on death when passing this down a generation. From April next year, the same business would suffer inheritance tax of up to £240,000. There will be questions to consider as to how a business could afford to weather such a large tax bill and the impact this will have on intergenerational family businesses.

A much greater concern for many people will be the impact of Inheritance Tax on pension pots from April 2027. This was only given a couple of sentences in the budget but the Chancellor’s own figures this will affect 8% of estates each year and result in an extra £1.34bn being taxed in 2028/29. We are yet to see exactly how this might be achieved but it seems likely that the result will be to cause pensions to accrue to an estate for the £2m taper threshold for the Residence Nil Rate Band (possibly like a life-interest trust).

As a result of this we may find that employees want to make some changes to their pension contributions in the near future as they change their planning around this and we might expect to see requests for pension contributions to be split between the employee and their spouse’s pensions.

Conclusion

The budget creates some immediate headaches for all businesses and some major challenges down the road for others.  It is possible that it will cause inflation, wage stagnation and even business collapse.  I would urge any business worried about the budget to seek financial advice.