As we move into 2025, UK SME owners face a range of tax changes that may significantly impact their businesses, particularly around inheritance tax. Staying informed and proactive is essential to navigating these changes effectively.
March Budget: More Tax Rises?
UK business owners should brace themselves for potential tax raids as Chancellor Rachel Reeves signals further fiscal tightening to address a faltering economy. Despite earlier promises to avoid new taxes or borrowing, industry experts are sounding alarms about the likelihood of tax hikes in the upcoming Spring Statement on March 26.
Economists had already predicted immediately after October’s Budget that Labour would likely need to raise taxes again if adverse market conditions prevailed. While the UK may outpace France and Germany in 2025, experts remain pessimistic about the broader economic outlook. Maxime Darmet, senior economist at Allianz Trade, stated, “Growth will undershoot the Government and the OBR’s forecasts.”
Reeves has already implemented a record £41.5 billion tax rise to address a £22 billion public finance deficit. However, experts believe additional tax hikes are “highly likely” in the Spring Statement. Andrew Goodwin of Oxford Economics noted that the OBR’s growth forecasts appear overly optimistic, with weak investment and productivity continuing to hamper the UK’s recovery.
Despite Reeves’ assurances to business leaders that she would avoid more borrowing or significant tax-raising budgets, several areas are now being flagged as potential targets and Labour have now refused to rule out tax rises.
7-Year Rule Under Threat
Rachel Reeves is reportedly considering adjustments to the gifting allowance in her upcoming Spring Statement, with financial experts warning that the longstanding seven-year rule is "under threat."
Currently, this rule allows individuals to transfer money or assets tax-free, provided they survive for seven years after making the gift. However, concerns are growing that the Government may extend this period to ten years or eliminate the rule entirely in a bid to boost tax revenues.
Inheritance tax is typically levied at 40% on estates exceeding the nil-rate band, which is presently set at £325,000. The seven-year rule enables individuals to pass on wealth tax-free or at a reduced rate if the donor survives beyond this timeframe.
There is mounting speculation that Ms. Reeves may view the gifting allowance as an “easy target,” particularly after her decision in the October Budget to include unused pension pots within the inheritance tax net from April 2027.
Ian Cook, financial adviser at Quilter Cheviot, cautioned that the rule is at risk, stating: “The seven-year rule could be the next easy target. Switching from seven to ten years is a very easy change to make. I wouldn’t be surprised if the Government announces a review of the process.”
Clock Is Ticking On IHT Hikes
In just over 12 months (April 2026) major changes will affect agricultural and business property relief. The first £1million of combined assets will qualify for 100% relief but amounts above this will receive only 50% relief. Business relief for unlisted shares, including AIM shares, will also drop to 50%, without the £1 million allowance.
For assets with 50% relief, the effective inheritance tax (IHT) rate will be 20%, instead of 40%. This £1million relief acts as a ‘lifetime allowance,’ covering estates, gifts, and trust transfers, but it won’t be transferable between spouses.
Many trusts will also face changes, with a shared £1million allowance. However, multiple trusts created before 30 October 2024 will retain separate allowances under existing rules.
Anti-forestalling measures will prevent pre-emptive action. Gifts made after 30 October 2024 will be reassessed under the new rules if the donor dies within seven years and after 5 April 2026.
These changes underscore the need for proactive estate and business planning. Seeking professional advice and taking action can help to mitigate the impact of these new rules and ensure optimal use of reliefs.
‘British Family Businesses Being Fleeced and Decimated’
Sir James Dyson has slammed the Chancellors inheritance tax changes as “vindictive,” warning they will “destroy” family businesses and cost the economy billions.
In a letter to The Times, the billionaire inventor argued that capping business and agricultural property relief at £1 million would lead to a 20% tax on family firms, forcing them to also pay income tax on top as a result of having to declare dividends to pay the IHT. “It is only British family businesses that are being fleeced,” he said.
Dyson noted that family business owners pay £3 billion in taxes and employ 14 million people. “Reeves will destroy both the family businesses themselves and a source of untold billions in tax revenue,” he warned, calling the policy “a confiscation of 20 per cent of all family companies at every generation.”
How Can Qubic Help?
To navigate these potential changes, Qubic offers tailored tax planning services. Our expertise can help mitigate the impact of higher taxes and leverage current reliefs effectively. The window of opportunity to leverage current tax rates and reliefs is narrowing, and the time to act is now.
We understand that the uncertainty surrounding tax changes can be challenging, and we are here to help you.
For more information on our tax planning services and to discuss your options with one of our team, simply click the link below:
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