Looking back to the election result in December 2019, which now seems a distant memory, few would have forecast the situation we are now in. The Conservative Party’s election pledge to not raise the rate of income tax, VAT or national insurance was made at a different time, with different priorities.
Most commentators are now predicting tax rises across the board, with speculation mounting that the initial focus could be on increases to Capital Gains Tax (CGT) or Inheritance Tax (IHT).
Whilst this maintains the election pledge (for now), it could have a huge impact on the traditional Conservative voter. Despite the risk, speculation was fuelled on 14 July when the Chancellor requested the Office for Tax Simplification (OTS) to review CGT, with a consultation ongoing until 20 October this year.
As well as the CGT review, two separate reviews were already ongoing into IHT prior to the Coronavirus crisis. The first was published by the OTS in July 2019, and the other by the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness in January 2020. In the reports, various suggestions were made, the more extreme of which included introducing a flat 10% lifetime gift tax, with a much lower lifetime exemption.
So far, the Government have been quiet on the prospect of income tax rises, only briefly mentioning the possibility of National Insurance Contributions (NIC) for self-employed individuals being aligned with employees. Given the much higher tax-take that income tax represents, it may not be viable for the Government to continue to honour the pre-election pledge.
But what does this mean in practice and what might the changes look like?
Looking at the detail of the CGT review, the questions posed focus on whether the tax-free annual exempt amount should continue at the current level (£12,300 for 2020/21), whether the tax rate should be different for long-term gains (mirroring the US tax system in some ways), the use of losses, and how the various CGT reliefs fit together.
Interestingly, the CGT review briefly discusses long-standing CGT reliefs, such as main home relief (or Principle Private Residence relief – PPR). Any change here would be hugely unpopular.
The CGT review is clearly at an early stage, but it has all the hallmarks of being a means to an end – a way to ‘tee-up’ wholesale reform, with potentially aligned rates of CGT and income tax.
CGT and IHT are certainly vulnerable, but the tax take for both are relatively small at £10bn and £5bn each for the year to 30 June 2020. Compared to Income Tax at £188bn, Corporation Tax at £57bn, VAT at £97bn and NIC at £139bn, there are bigger targets to aim for, however politically uncomfortable that might be.
Pensions relief might also be under close review. The ‘Exempt, Exempt, Tax’ model, or EET -where income is not taxed when contributed to a pension, is tax free when invested in the pension wrapper itself, and is only then taxed when paid out – is hugely expensive, despite the recent restrictions to the lifetime value and annual maximums. It has been suggested before that pensions relief should be reformed from the EET model to a Tax, Exempt, Exempt (TEE) model, where income is taxed as normal and then tax free when invested/on extraction – much like for ISAs. Alternatively, a compromise might be to restrict the tax relief rate on the way in, for example to 30% relief as a flat rate.
Against this backdrop, what are we seeing clients do?
It is important to recognise that to make accurate predictions now would require a crystal ball. However, the trend is clear: other than additional and sustained borrowing, taxes are one way the Government will begin to pay back the enormous debt pile and are likely to be increased, rather than reduced (CGT for example is at a historic low).
It is therefore not unreasonable to accelerate existing plans now to lock-in the available reliefs as far as possible.
For example, it might be appropriate to make a gift to family members to begin running the ‘clock’ for the seven-year IHT exposure, whilst that rule exists, or by transferring investments to a Family Investment Company. This may enable the process of succession to begin whilst retaining some control, with the next generation taking more of a role in looking after the investments. The share structure of the company should be looked at carefully, with different classes allowing effective IHT planning to take place.
Alternatively, a family trust may be established which allows an even greater degree of control to be retained, whilst accelerating lifetime gifts now. Where the conditions are met, a relief from both IHT and CGT may be available to prevent a dry tax charge, under current rules.
Accelerating pension planning and/or the timings of income distributions would also be sensible, if at all possible.
Of course, any decision must not be primarily driven by tax and it would not be reasonable to formulate plans entirely for tax reasons. You will need to make sure the timing is right when looking at the general market environment and to seek investment advice. If planning can be done in a (relatively) favourable tax environment, before the rates are increased or reliefs restricted, even better.
Either way, the Coronavirus may give the Government the nudge they were looking for to push this through.
The taxation of property has constantly changed over the last 10 years, particularly for international investors, with the latest proposed changes due in April 2021 with a 2% SDLT surcharge for non-resident purchasers. Landlords face such a high effective tax relief when factoring in mortgage interest relief restrictions that there may not be much room left for further changes.
The recently announced Stamp Duty Land Tax (SDLT) holiday is hopefully recognition that this tax, perhaps more than any other, influences the property market. We saw a flurry of activity before the additional 3% rate was introduced in 2016 and are aware of renewed activity again now. The SDLT is in dire need of simplification, even ignoring the different rates and bands in the devolved administrations. Higher transaction volumes should, in theory, increase the SDLT take.
Although it would take a bold Chancellor to meddle with the income tax regime, there is an argument that reforming aspects of the tax which are not material and simply add complexity, is long overdue. In addition, the prospect of income tax and NIC being aligned has been suggested so many times before, could now be the moment the nettle is finally grasped?
Finally, the Institute for Fiscal Studies (IFS) produced a report on 2 July 2020 looking at whether now was the right time for a Wealth Tax. Such a tax has been discussed many times before. In our view, a wholly separate Wealth Tax is extremely unlikely, with Boris Johnson all but ruling this out prior to the Summer Statement in early July. That said, a Wealth Tax can be delivered in more than one way – increasing capital taxes achieves a similar result with less controversy.
Would you like to know more?
If you would like to discuss the above, please contact Robert Pullen or Nimesh Shah whose details are to the right.