With Government debt approaching £400bn it seems likely that tax increases will be included in the Budget due on 3 March. The Government may consider that it could copy the post WWII Government, which repaid war loan over many decades, letting inflation reduce the debt. Yet leaving future generations to bear the economic cost may not be popular. The Conservative Manifesto of 2019 ruled out increases in income tax, VAT and national insurance and while the Government could argue that Covid changes everything, I believe that the Chancellor will not increase these taxes as it would hit consumer confidence, which may be the key to economic recovery.
In December the self-styled Wealth Tax Commission made up of academics from LSE and Warwick scared middle England by proposing a one-off wealth tax of 5% of all personal wealth. They estimated this would raise £260bn. The proposal to tax all with assets of £500,000 or more was popular with focus groups, as are all taxes perceived to be paid by others. As this would include homes and private pensions it was expected that 17% of the adult population would pay this tax, with the bulk falling on the 55 to 65 age group.
It is unlikely that a Conservative Chancellor will embrace this proposal, Rishi Sunak rejected the idea of a new wealth tax earlier in the year. It seems more likely that tax increases will fall on capital gains tax and inheritance tax. Moreover, the Office of Tax Simplification (OTS) has set out proposals for reforms to these taxes. The Treasury has also consulted on changes to the way pension savings tax relief is administered. Link to previous article
Capital Gains Tax Reforms
Capital gains is levied on the capital profits made, less costs and allowable losses, when selling or gifting capital assets such as land and buildings or shares. There is an annual allowance of £12,300 per person so that tax is only charged on net gains above this. There is an exemption on transfers between spouses and civil partners who can double up on the annual allowance by transferring assets prior to disposal. The net gain is added to the individual’s income and taxed at 10% or 20% (18% and 28% on residential property) depending whether the income plus gain is below or above £50,000.
On death any gain inherited is “uplifted” so that the inherited asset has a base value for capital gains as at the date of death. This rule is often a reason for investors to adopt a long term buy and hold strategy.
On Capital Gains the OTS would:
- Reduce the annual allowance to £3,000 per person;
- Increase the tax rates in line with income tax rates, and
- Remove the capital gains uplift on death so that the gain would be taxed at that point.
Inheritance Tax Proposals
In it’s 2019 review of IHT the OTS noted that only 25,000 estates pay inheritance tax but 10 times that number must complete a long and complicated form.
Currently gifts made in the previous 7 years, in some cases previous 14 years, must be tracked down and there are a plethora of exemptions and allowances many of which have not been uprated for some time. Those in the sights of the OTS are:
- Gifts from surplus income which are wholly exempt, to be reviewed;
- A small gifts exemption of £250 per donee, to be increased;
- An annual allowance of £3,000 per donor, carried forward for one year, to be increased;
- Gifts in consideration of marriage or civil partnership of varying amounts, to be withdrawn and included in the higher annual allowance;
- Outright gifts made seven years previously, on which the tax payable tapers after three years, to be cut to five years, with no taper allowance, and
- Business property relief, including AIM shares owned for over two years, to be removed unless the shareholder has a controlling interest in the business.
Action for investors
Taking action to use up current allowances and reliefs prior to the end of the tax year and before Budget Day on 3 March is a sensible precaution. This could include:
- Realising gains and losses on long held investments within the current annual allowance;
- Transferring assets to a spouse or civil partner prior to disposal, if they have unused allowances or a lower tax rate;
- Reinvesting gains realised within an Individual Savings Account up to the £20,000 annual allowance per adult;
- Reinvesting gains into a pension, which pays no tax on funds rolling up until they are drawn as income and currently offers income tax relief on investment at the taxpayer’s marginal income tax rate. Pension funds are usually IHT exempt;
- If able to take a much higher level of investment risk, to consider a Venture Capital Trust or Enterprise Investment Scheme where gains made may be tax sheltered, and
- If making lifetime gifts in excess of £325,000 nil rate band, consider the benefits of taper relief over seven years, compared to five years with no taper.
However, the tax tail must not wag the investment dog and seeking financial advice on how to structure investments post Budget, taking account of personal needs and circumstances may be beneficial.
More from Kay: Pay less tax using easily available reliefs and allowances