On October 30, 2024, Chancellor Rachel Reeves presented her Autumn Budget, setting the stage for the Labour Party’s first policy outline in over 14 years. This Budget is shaped by the government’s aims of ensuring fiscal responsibility, restoring public services, and stabilising the economy.
The Budget has wider implications for family law and will likely impact individuals and families going through proceedings, specifically those negotiating financial settlements. In the weeks before the budget announcement, much discussion centred around the prospective tax changes including an increase in Capital Gains Tax (CGT), and amendments to inheritance tax.
During this time, family law professionals directed clients who were mid-negotiation to financial advisers so they could fully understand the potential impact of any changes on their assets. There were a number of cases put on hold until there was more clarity.
Now that the dust is settling, family lawyers can reflect on the implications of the Budget on clients moving forward. It is important that legal and financial professionals are abreast of the changes and how clients may be uniquely affected.
Fiscal policy
The Budget commits to an incremental government spending increase averaging 2% of GDP per year over the coming five years to address infrastructure deficits and reinforce public services. This increase in expenditure is divided into two major allocations:
- Investment spending
Approximately one-third of the increase is allocated to capital projects, with a focus on transportation, housing, and research and development. This increased spending aims to stimulate long-term growth, enhance infrastructure, and support innovation. - Operational spending on public services
The remaining two-thirds will strengthen the day-to-day functioning of public services, including healthcare and education, aligning with Labour’s objective of rebuilding essential public services.
Financing mechanism
The fiscal expansion is funded by a strategy involving significant tax law adjustments and additional borrowing. Approximately half of the increased spending will be sourced from tax revenue, while the balance will rely on increased borrowing. The key changes in tax are as follows:
- Employer National Insurance contributions
A notable change for businesses is the increase in employer National Insurance contributions. From April 2025, the employer National Insurance contributions rate will rise from 13.8% to 15%. The threshold at which employers begin paying employer National Insurance contributions will also be reduced from £9,100 to £5,000. This change seeks to raise revenue from employers, though qualifying employers may partially mitigate this impact through the employment allowance, which offers relief on National Insurance liabilities. It is anticipated that this change may impact on employee benefits.
- Capital Gains Tax (CGT)
As of October 30, 2024, capital gains tax rates have increased for assets above £3,000 from 10% to 18% (lower rate) and from 20% to 24% (higher rate). In addition to this, rates under Business Asset Disposal Relief and Investors’ Relief are scheduled to rise in April 2025 and April 2026, respectively. These changes represent an effort to generate additional tax revenue from disposals, particularly in the business sector, and may influence asset disposal strategies. - Inheritance Tax (IHT) on pension wealth
From April 6, 2027, Inheritance Tax will be applicable to pension wealth, including unused pension funds and death benefits. This move broadens the scope of Inheritance Tax and may require estate planning professionals to review strategies to advise on tax effective solutions. - Agricultural and Business Property Relief
Adjustments to Agricultural Property Relief and Business Property Relief will change the treatment of certain assets for Inheritance Tax purposes. These changes may impact clients in these sectors who wish to preserve wealth across generations.
Additional emasures
The Chancellor reiterated several key tax policies from the Labour Party’s manifesto, including:
- VAT on private education fees
Private school fees will be subject to VAT, introducing additional tax implications for private educational institutions and their clients. - Energy profits levy
The energy profits levy will be increased, ensuring that energy companies’ revenues are further taxed. This adjustment is anticipated to affect corporate tax planning for clients in the energy sector. - Residence-based taxation
The Budget also confirms the Labour Party’s intention to eliminate the ‘non-dom’ tax status and implement a residence-based regime. This adjustment will close long-standing tax reliefs for foreign domiciled individuals residing in the UK and may influence the residency planning strategies of high-net-worth people.
Broader implications of changes to CGT
The 2024 Autumn Budget represents a shift in tax policy and fiscal strategy with implications for various legal practices and individuals. These tax changes, particularly around National Insurance contributions, CGT, and Inheritance Tax, will require proactive engagement with clients who may need to reconsider financial strategies and estate planning in light of higher tax liabilities.
The increased rate of CGT, although not as high as had been anticipated in advance of the budget announcement, will still have an impact on couples who have assets where CGT will be applied upon the sale. Those couples with relatively modest asset bases, including, for example, holiday homes, shares outside Isas or even collections of artworks, will feel the effects of the change, possibly more so than ultra-high-net-worth or high-net-worth couples (HNWs).
Family law professionals will need to be alive to the impact. Where divorcing couples have assets needing selling upon divorce, these will bring in less income than they would have done previously. The overall matrimonial pot will reduce, meaning less to be shared between the parties. HNWs may not feel the effects of this so strongly as modest asset parties.
If there has been an agreement made between the parties, any deviation will need to be examined and proved justifiable on a case-by-case basis. Some cases may adjust from being a ‘sharing case’ to being ‘needs case’, where more assessment and negotiation will be required to ensure each party has enough to rehome and meet monthly outgoing requirements.
Unfortunately, where couples have finalised a financial settlement and been granted a binding financial consent order, this will not be able to be adjusted. Parties may need to come to an informal arrangement between themselves if they have CGT-applied assets that are yet to be sold.
Broader implications of changes to Inheritance Tax
The Chancellor has frozen inheritance tax until April 2026. Whilst it may seem that there will be little to no impact in the short term for divorcing couples, a further freeze will mean that as assets increase in value over time, more people will feel the effects of greater tax liability. Ultimately, less inheritance will be received. Where parties are going through divorce proceedings and anticipating inheritance, the party expecting the estate will have a smaller pot. Inheritance is not usually considered a matrimonial asset, and will not be shared, however it does mean that that individual party will have less in their pot, which may mean they need more from the shared assets.
The most significant change, however, is that pensions will be subjected to Inheritance Tax from April 2027. In most cases, pensions are not included when totalling the value of an estate. When this new law is implemented, there could be a significant impact on the estate if a large pension pot forms part of an inheritance.
Conclusion
The reallocation of government spending signals increased funding for infrastructure and public services, which may stimulate demand for legal services related to public contracts, regulatory compliance, and employment law, especially as government projects ramp up in transportation, housing, and research and development.
This Budget highlights the Labour government’s commitment to funding public services and fiscal stability while realigning the tax burden across businesses, capital gains, and wealth transfers. Legal professionals will need to stay closely engaged with evolving developments to guide clients through the changing landscape.
Judit Kerese is an Associate at Stowe Family Law.
Photo by Scott Graham on Unsplash.
