Autumn Budget 2024 - Impact on the Financial Services sector

One of the main announcements centred around the increase in National Insurance Contributions (NICs). With a significant reliance on human capital, the financial services sector will bear a heavy burden in terms of additional NIC costs. We have explored in more detail the impact of this, and the potential mitigation steps employers can take, in this dedicated article.

Other announcements affecting the financial services sector include the following:

Common Reporting Standard / FATCA

The government has issued a consultation and draft regulations amending the International Tax Compliance Regulations 2015, which implement the Common Reporting Standard ("CRS") and the FATCA agreement. The consultation closes on 1 January 2025. The regulations are expected to come into force on 1 January 2026. Generally, the proposed amendments will increase the compliance burden on financial institutions ("FIs").

The proposed amendments include:

• Mandatory registration with HMRC for all Reporting FIs and certain trusts where the trustee is a Reporting FI – at present, a FI which has no reportable accounts need not register with HMRC. Mandatory registration aims to ensure that reportable accounts are not overlooked. Registration would be due within 6 months of meeting the relevant criteria or by 31 December 2025 if later. Failure to register will incur a penalty.
• Account holders will have to provide valid self-certifications upon request by a FI – or face a penalty. This will strengthen FIs' ability to obtain reportable information.
• Revisions to the penalties and appeals process – a complete overhaul is envisaged. Penalties for due diligence failures will be charged for each account holder where there is a failure. Although there are safeguards against duplicate penalties in respect of the same act or omission, penalties could aggregate significantly. Record-keeping penalties will be capped for each reporting period. Late returns will incur a capped penalty, plus a daily default penalty if a compliance notice is ignored. Inaccurate or incomplete reports to HMRC will incur a penalty per account holder affected if the error is deliberate, careless or the FI fails to take reasonable steps to correct it.
• Other changes:
  • The definition of the CRS is amended to include the 2023 changes to the CRS and its commentary, including amendments for 'Relevant Crypto-Assets' and 'Specified Electronic Money Products'. Relevant Crypto-Assets are introduced into the definitions of Investment Entity, Financial Asset and Exchange Transaction.
  • A Specified Electronic Money Product, meaning a digital representation of a Fiat Currency (i.e. a stablecoin), is introduced into the definitions of Depositary Institution, Fiat Currency and Depositary Account.
  • Obligations to provide some notices to clients will be revoked. The basic obligation to inform reportable persons about the Automated Exchange of Information remains.
  • The definition of the FATCA agreement will include changes in 2012 and 2019.

These changes will broaden the numbers of Reporting FIs and Reportable Accounts.

Crypto-Asset Reporting Framework ("CARF")

In parallel with the CRS amendments, the government has also issued a consultation and draft regulations on the CARF. The consultation ends on 10 January 2025. The draft regulations adopt the rules set out in OECD's Crypto-Asset Reporting Framework, published in 2022. They will oblige reporting Crypto-asset Service Providers ("RCASPs") to collect and report details of crypto-asset users and transactions in crypto-assets.

The system will mirror that of CRS reporting, with modifications. RCASPs are individuals or entities that, as a business, provide a service effectuating 'Exchange Transactions' in crypto-assets, for or on behalf of customers. UK financial services businesses which provide such a service will, like other RCASPs, be obliged to report data on Reportable Users, starting with the year 2026, reportable to HMRC by 31 May 2027.

Inheritance Tax (IHT) changes impacting the insurance industry

From an insurance industry perspective, two inheritance tax changes may impact the industry:

• From 6 April 2026: reduction of Business Relief from 100% to 50% on assets valued above £1m. This creates an effective IHT rate of 20% on assets valued above £1m. One of the key selling points in recent years of the London Market (Lloyd's participation) to high and very high net worth individuals has been the availability of Business Relief which has meant that businesses with valuable syndicate capacity have been capable of being passed through generations tax-free. The reduction in Business Relief may, at the margin, reduce the attractiveness of participation in the London Market and so increase the market's cost of capital.
• From 6 April 2027: where the deceased dies with assets remaining in a pension fund, the unused funds will form part of the deceased’s chargeable estate. This will cause more pension pots to come into the IHT net, which may impact business volumes and profits of long-term insurers offering pensions to UK residents. Business volumes at the high (but not very high) end of the market may decline, and if assets under management decline, so could profits. Pension scheme administrators (which can include insurance companies) will become liable for payment of inheritance tax on undistributed pensions, and will have to undertake complex data gathering and calculations in collaboration with personal representatives of the deceased.

Asset management – changes to carried interest

Following a consultation earlier in 2024, the government will legislate to change the taxation of carried interest.

In the asset management sector, particularly in venture capital and alternative investment funds, carried interest is an interest in an investment fund, typically held by the fund's founders. The government estimates that 3,100 people working in the asset management sector receive carried interest. Carried interest is usually subject to Capital Gains Tax.

The tax treatment of carried interest will be reformed in two ways:

• Firstly, by increasing the Capital Gains Tax rate on carried interest from 28% (or 18% for basic rate taxpayers) to a single rate of 32% from 6 April 2025
• Secondly, from 6 April 2026, by introducing new rules which the government considers will reflect the economic characteristics of carried interest as a reward for management services. The new carried interest regime will come within the Income Tax framework, with a 72.5% multiplier applied to qualifying carried interest. This means, for example, that an income taxpayer in the 45% band would suffer a 32.625% tax on carried interest.

Alternative finance

The government intends to change the alternative finance rules, to broaden the scope of 'shared ownership arrangement' products which financial institutions and regulated home purchase plan providers can offer, under tax rules where the tax treatment is made equivalent to that of conventional lending. Following the 2024 consultation on alternative finance, the ambit of alternative finance rules will be extended, so that they can apply to properties that do not currently qualify for Capital Gains Tax Private Residence Relief, such as rental properties, second homes and commercial properties.

Draft legislation has been published, to be included in Finance Bill 2024-25, amending relevant tax rules for Capital Gains Tax, Corporation Tax, and Income Tax. The changes will apply from 30 October 2024, to ensure that tax consequences are the same for those using alternative and conventional financing arrangements across the UK.

Asset finance – extending full expensing to leasing?

The government acknowledged the case made by the asset finance industry to extend full expensing to assets bought for leasing and will 'explore' making this change 'when fiscal conditions allow.' The cautious commitment to 'explore' a change is even more tentative than the previous government's 'intent' to implement the change 'as soon as it is affordable'. Based on this cautious language, lessors should not expect full expensing any time soon.

Bank taxes

The government stated that bank levy and bank surcharge are to be 'kept under review' in the light of 'responsible fiscal policy' and the government's 'growth mission.' This means there is no change in the rates, exclusions and allowances for these taxes – for now. However, the phraseology does not exclude the possibility of future changes.

Looking ahead

In the field of alternative finance, subject to the enactment of the final legislation, financers and their customers can start planning already for the broader scope of shared ownership arrangements. This is effectively a permissive measure.

In the other areas we have highlighted, increased tax effects or compliance burdens will be felt in the coming years:

• New due diligence and reporting obligations under the CRS and the CARF will apply from 1 January 2026
• The Lloyd's London Market may see the impact of reduced IHT business relief from 6 April 2026
• Insurers which are pension scheme administrators will have to plan for IHT reporting from 6 April 2027
• Individuals holding carried interest will see significant tax changes for the years 2025/26 and 2026/27

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