1. What is the main focus of the HM Revenue & Customs (HMRC) team looking into family investment companies (FICs)?
A spokesperson for HMRC said that: “The Family Investment Company team was established in April 2019 to look at FICs and do a quantitative and qualitative review into any tax risks associated with them with a focus on Inheritance Tax (IHT) implications.”
As their work is only exploratory at this stage we have not seen any enquiries or how the unit may approach individual cases.
FICs became popular in 2006 when changes to IHT meant that most transfers to trust by a UK-domiciled individual would give rise to an immediate IHT liability.
However, the benefits of a FIC can go much wider and, in particular, take advantage of the differential between Income Tax rates (currently up to 45%) and Corporation Tax rates (currently 19%) and so it would be surprising if HMRC did not look at the structures more widely than just IHT.
2. As a percentage, what do you believe is the likelihood of Capital Gains Tax (CGT) rates moving back to Income Tax rates? What is the likelihood of a CGT rate rise in the near to intermediate term?
It does seem likely that CGT rates will increase.
Higher and additional rate taxpayers currently pay CGT at 20%, rising to 28% on residential property and carried interest, and so an obvious change would be to align CGT on all disposals to 28%. This has the added advantage of simplifying CGT so that there are no longer two different rates depending on the asset that is being disposed of.
It wasn’t too long ago (prior to 6 April 2008) that CGT rates were aligned with Income Tax rates and there was a maximum CGT rate of 40%. However, taper relief was also available at the time which reduced the chargeable gain over the period of ownership.
It would be a significant step by a Conservative Government to double the rate of CGT, but it can’t be ruled out. It’s also worth noting that CGT is widely regarded as a tax paid by the wealthy, but it raises very little. A move to increase the rate may not be anything more than a political gesture.
3. Should we expect a post-COVID-19 Budget later this year to address the borrowing for COVID-19 support? And if so, do we expect that there would be any tax changes for April 2021 given the economy is expected to recess this year?
It appears that there will not be a major Budget until the Autumn Budget which gives the Government time to assess the economic situation. The last Autumn Budget took place in October 2018. Whilst there isn’t now expected to be an Emergency Budget, the Chancellor is due to announce some limited measures and possibly some consultations in July.
Given the impact of COVID-19, I think it is safe to say that there will be tax changes from April 2021, whether these are to increase revenue or stimulate the economy or both. Although it’s unlikely, there could also be tax changes which are introduced with immediate effect from the announcements in July or at the Autumn Budget but these type of changes are unpopular as well as complicated.
4. Do you have a comment on Agricultural Property Relief (APR)?
Prior to the March 2020 Budget there were concerns that APR would be scrapped or restricted, but it remained untouched. It seems unlikely that the Chancellor will bring in any measures now that affect the rural community.
In the July 2019 Office for Tax Simplification report on the reform of IHT, it was debated whether APR and business property relief (BPR) could be abolished both to simplify the tax system and to fund an overall reduction in the rate of IHT. However, the conclusion was that the abolition of APR and BPR would only fund a reduction in the overall rate of IHT from 40% to around 33.7%.
5. In the case of a wealth tax, I assume one of the challenges would be in regard to liquidity (asset rich/cash poor)? And another would be valuations?
We agree that one of the biggest issues with a wealth tax will be how it is funded where there is little liquidity.
As with the introduction of any new tax, the major hurdle will also be in its implementation.
From 2013, with the introduction of the Annual Tax on Enveloped Dwellings (ATED) and, from 2015, with the introduction of non-residents Capital Gains Tax (NRCGT), valuations of UK residential property have been required with increasing frequency and have not prevented these new taxes from being introduced.
Whilst formal valuations are always recommended in these cases, HMRC appear to accept that quite often best estimates/desktop valuations may be used, although the individual is then at a greater risk of enquiry. You would expect some level of pragmatism with the introduction of a wealth tax as well.
6. What about regular gifts out of surplus income?
The IHT exemption for normal gifts out of income requires detailed record keeping and there is quite often uncertainty about whether it is available.
The July 2019 Office for Tax Simplification report on the reform of inheritance tax made recommendations that this relief should be replaced with a higher general relief for personal gifts. Another suggested was that the need for such expenditure to be ‘regular’ should be removed and a limit introduced.
IHT as a whole is a key area that would benefit from reform, but the Chancellor may find it easier to scrap it entirely (and perhaps replace it with a system where CGT applies on death), than make tweaks to the already complex and unwieldy legislation.
7. What tax changes were implemented post WW2 when Government debt levels were very high?
Post-war Income Tax rates were very high and remained so for many years.
The eventual reduction in Income Tax rates was achieved through the introduction of VAT in 1973, in anticipation of Britain’s entry into the European Economic Community, and the widely unpopular Poll Tax in 1988.
Any increase in Income Tax would break the ‘triple tax lock’ the promise not to increase Income Tax, VAT or National Insurance (NIC) – but, in these times, it is suggested that all bets are now off. An increase to Income Tax and NIC rates would be the quickest way to raise revenue and there would be pressure to increase Income Tax rates for the wealthy, but a significant increase would be controversial politically.
Would you like to know more?
If you would like to discuss any of the above or have other queries about how you can make the right decisions for the future of your business and your income, please contact your usual Blick Rothenberg contact or one of the contacts to the right.
For our latest insights, sign up here to receive important Private Client updates delivered directly to your inbox.