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Insight: which tax levers might the Chancellor pull in his October Budget?

Nimesh Shah reviews the pros and cons of raising taxes to meet the UK treasury deficit created by the Coronavirus pandemic.

Capital Gains Tax (CGT)

What could happen: There has been speculation for some time (even prior to the Coronavirus pandemic) that CGT rates would increase. The headline rate of CGT of 20% is considered to be very favourable and there are growing calls that it should be increased to 28% across the board or possibly aligned to Income Tax rates. There is actually a compelling argument that CGT should be abolished completely as part of the wider reform of capital taxes and the fact it raises so little in overall tax revenue. However, this is highly unlikely from a political standpoint.

Case for: Politically, it is a very easy move for the Government to make and sends the right message that the wealthy (who pay CGT) are taking on a higher tax burden.

Case against: The latest statistics from HM Revenue & Customs (HMRC) show that HM Treasury generated £9.5bn in 18/19. This was a record year for CGT receipts but represented only 1.5% of the total tax take. Any rate increase is unlikely to make a significant impact on overall tax revenue. It’s also worth noting that there has already been a CGT increase this year when Rishi Sunak, in his first Budget as Chancellor, cut the Entrepreneurs’ Relief lifetime limit from £10m to £1m, costing an affected taxpayer £900,000 in CGT.

Inheritance tax (IHT)

What could happen: The ‘Seven year rule’ for gifts (known as the potentially exempt transfer rule for gifts) could be abolished and replaced with a lifetime gift allowance. It’s unlikely that the 40% rate of IHT would be increased but it could be feasibly reduced to 20% if a lifetime gift allowance is introduced.

Case for: Critics have long argued that IHT is an optional tax and can be easily avoided by someone if they plan to give away or spend their wealth before their death. The Government has been closely looking at ways to increase revenue from IHT for some time.

Case against: Reform of IHT is long overdue and it requires careful consultation, alongside reviewing capital taxes more generally. It’s unlikely dramatic reform would be introduced in the next Budget but changes could happen in the future. Similar to CGT, IHT raises very little in tax take for the Treasury, so it is questionable as to how much impact any changes would have on revenue generation.

Reform of IHT is long overdue and it requires careful consultation, alongside reviewing capital taxes more generally.

Income Tax

What could happen: A universal increase to Income Tax by 1% and/or re-introduction of the 50% Income Tax rate for those earning over £150,000. The Income Tax increase could be made temporary, with the additional revenue being directed to the NHS.

Case for: It’s very easy for the Government to increase Income Tax and is likely to accepted by most, mainly on the grounds of sentiment given the widespread impact of the pandemic.

Case against: Such a proposal would go against the Government’s ‘triple-lock’ and could therefore be met with strong political criticism. There is compelling evidence that the 50% Income Tax rate (which applied from 2010 – 2013) did not actually lead to an increase in tax revenue.

Corporation Tax

What could happen: An increase to the rate of Corporation Tax from 19% to 24-28%.

Case for: The majority of people would not negatively view an increase to Corporation Tax and it would be seen to target the large tech companies who have potentially benefitted during the Coronavirus pandemic.

Case against: The Government should not increase taxes for businesses at a time when the economy is so fragile and many businesses are treading water. An increase to Corporation Tax is damaging from an international standpoint, and the Government need to think about how they can encourage more international businesses to relocate to the UK, especially under the backdrop of Brexit.

The Government should not increase taxes for businesses at a time when the economy is so fragile and many businesses are treading water.

National insurance (NIC)

What could happen: Abolish the Class 2/4 NIC system for self-employed individuals and those individuals paying the same NIC as employees.

Case for: The Chancellor has suggested several times that the tax system for the self-employed needs reform, because of the perception they pay less tax than the employed worker. Abolishing Class 2/4 NIC would simplify the NIC system and the small tax benefit of being self-employed would be completely removed.

Case against: The self-employed have been vocal about the limited Government support they have received during the Coronavirus pandemic, and such focused tax rises will not be well received.

Dividend tax rates

What could happen: Aligning dividend tax rates to the main rates of Income Tax of 20%/40%/45%.

Case for: This would be another measure aimed at the self-employed who operate through limited companies and pay themselves through dividends. There would be also be a knock-on effect for investors who receive dividend income from their share portfolios. It’s arguable that such a move does not go against the ‘triple-lock’ because it is not technically an Income Tax increase and could generate significant additional tax revenue.

Case against: Pensioners who live off income from their savings would be dismayed by such a change. Private businesses would argue that this change harms the UK’s business tax regime and would protest strongly.

Capital Gains Tax (CGT) main residence relief

What could happen: Main residence relief could become subject to a lifetime or per-transaction cap.

Case for: Main residence relief is one of the most generous reliefs in the UK’s tax system, allowing home owners to make tax-free capital gains when they sell their main home. With numerous changes to the taxation of residential property over the last ten years, it’s the last remaining ‘tax grab’ for the Government and could generate significant revenue in CGT.

Case against: The Government should be nervous about introducing any tax changes which impact the housing market. It would also be counter-intuitive to introduce a change which restricts the housing market when the Stamp Duty Land Tax holiday announced by the Chancellor in July was designed to do the opposite.

Pensions

What could happen: Higher rate tax relief for pension contributions is abolished.

Case for: Pensions tax relief is estimated to cost the Government £25bn and restricting the relief should go some way to meeting the Government’s apparent revenue target of £20bn. The highest earners are now restricted to only £4,000 of tax relievable pension contributions and they may not feel overly aggrieved if relief was limited completely to the basic rate. It would also simplify the pensions regime which has caused serious confusion for NHS consultants with defined benefit pension schemes.

Case against: The Government should be nervous about discouraging saving for retirement further, but they could easily ignore that issue given the short-term savings that could be generated.

Conclusion

With the economy so fragile and jobs on the line, Rishi Sunak and the Government need to ask themselves whether now is the right time for tax rises. It remains an incredibly uncertain time, as we enter the crucial winter trading period and lots of businesses will be looking over their shoulder as the furlough scheme finally comes to an end. This is not the time for substantive changes and businesses need support, certainty and stability.

The Government also needs to consider the international outlook with Brexit firmly on the horizon, and Rishi Sunak needs to be mindful of inward investment from a corporate and private wealth perspective.

Instead of tax rises, the Government needs to look at a further package of support for businesses, such as a National Insurance holiday to maintain and encourage employment.

Would you like to know more?

If you would like to discuss the above article or have questions about how tax changes could impact you, please get in touch with your usual Blick Rothenberg contact or Nimesh, whose details are to the right.