It’s been a testing few months. If I had been speculating on likely Budget measures in the first few months of this year, I would doubtless have focussed on the Conservative election manifesto and Boris Johnson’s pledge to not raise Income Tax, VAT or National Insurance.
Now, with Brexit in the background and the Office for Budget Responsibility forecasting a £350bn deficit, the likes of which have only ever been seen during world wars, it’s quite hard to believe that the election was less than 8 months ago.
The spring statement was dominated by COVID-19 support measures. Nine days later came the introduction of the furlough scheme, followed by almost daily announcements about a collection of funding measures and tax payment deferments throughout the early weeks of lockdown. And then, in the Summer Economic Update, a quite generous change to Stamp Duty Land Tax (SDLT) and a cut in the rate of VAT for the hospitality and attraction sectors.
Paying for the pandemic
Now, and still only six months into the job, Chancellor Rishi Sunak finds himself in charge of recovery. One school of thought is that he will take advantage of the low-interest rates and we’ll live with the debt long term, however, it’s hard to believe that tax increases won’t feature in one form or another. And it’s in thinking about what might happen next that I share my own speculation….
The press has made much of the possibility of a wealth tax and it was only back in January when the All-Party Parliamentary Group (APPG) for Inheritance & Intergenerational Fairness published their ‘Reform of Inheritance Tax’ report. We covered this in a blog but, in short, the APPG recommended that the government replace the current IHT regime with a tax on lifetime and death transfers of wealth, with very few reliefs and a low flat rate, likely between 10% and 20%.
Whether these changes are under consideration remains to be seen. It’s also possible that a standalone entirely new form of wealth tax could be on the agenda, although it isn’t something that has been widely used in other countries, in fact, a number of countries that have implemented a wealth tax have subsequently moved away from it. I would question whether HMRC has the capacity to cope with an entirely new tax with challenges around valuations? It is, of course, possible but at the moment, I think such a wealth tax seems a less likely option.
Income tax increases are a possibility but given the desire to get the economy going, I can’t imagine that this will be the Chancellor’s first choice. An increase in basic rate tax could affect a lot of people who have already suffered financially during lockdown. Similarly, a rise in VAT would arguably cost money as spending power would decrease.
In my opinion, the one tax where a change seems increasingly likely is Capital Gains Tax (CGT). This is payable when something has been sold, so there should be ready cash available to pay the tax, which is sometimes perceived as a tax on the wealthy. Although not a large revenue-generator, increasing CGT would send an “in it together” message from the Government. We have various rates of CGT – 10%, 20% and 28%, the latter being payable on residential property. This compares with our income tax rates of 20%, 40% and 45% – so would it be that surprising if CGT rose to 40 or 45% perhaps?
We have already had a big reduction in Entrepreneurs’ Relief which offers a 10% tax rate on a qualifying business disposal – previously up to £10m per person could attract the 10% rate, but this reduced to £1m in March.
We don’t have any inside track on this, but there are things you can consider if you are concerned about possible CGT increases. What action you might take all depends on your individual circumstances but some of the things to think about include:
- If you are looking to sell an asset this year, you may want to complete the sale before the next budget day – we usually get a few weeks’ notice of when that is, current speculation is October
- If you are wanting to liquidate a company, now may be a good time to start
- If you are planning on gifting assets and know that will trigger CGT, then now may be cheaper than next year if the rates do increase
- If you cannot get a sale to go through in time, there are options to explore where you can trigger the tax charge early, you just have to make sure you then have the ability to pay the tax if it doesn’t sell.
These are just suggestions around the timing of actions you may already be considering and shouldn’t be taken as advice to initiate any decisions based solely on tax planning. Planning can be difficult at the best of times, but when trying to mitigate against potential tax hikes, it really is worth spending some time exploring your options and getting the right advice. We cannot help you with crystal ball gazing, but we can help you think through your options and take sensible action, so get in touch with tax partner, Kate Naylor by calling 0113 297 6825 or email email@example.com.