Tax changes on the horizon
Feb 09, 2021
There has been a lot of speculation on what will be in Rishi Sunak’s second Budget in early March and whether there is any planning for tax changes that you should consider before then.
The government will have to start paying down the massive £2 trillion of Covid support borrowings at some stage. Increasing tax rates would send the wrong message when the government is trying to stimulate economic recovery.
What the Chancellor is more likely to do is abolish or restrict some of the generous tax reliefs that we have got used to taking advantage of. That would have the effect of raising tax revenue without increasing headline rates.
Although likely to be unpopular with Conservative party voters and backbenchers, it is possible that the Chancellor will target pension tax relief and capital taxes in his Budget. These tax changes may well be announced as a “simplification” of the rules but that often hides tax raising measures in the small print!
If you are buying property you might also want to speed up transactions as much as possible if you can, as the beneficial stamp duty land tax rates are scheduled increase from 1 April 2021. However listen out in the Budget, as the chancellor might possibly announce an extension of the SDLT relief to support the property sector for a few more months.
Another bit of good news to listen out for would be yet further extensions to the CJRS furlough and SEISS grant schemes. These grant schemes are currently scheduled to end on 30 April, and it would be beneficial to receive more notice of their extension this time round.
Pension tax changes under the spotlight?
One area where the Chancellor could raise a substantial amount of tax would be to restrict higher rate tax relief on pension contributions.
There have been recent consultations with the pensions industry and it has been suggested that the government top up might be increased to 30% but with no further tax relief. That would continue to encourage people to save for their own pension but the better off would receive less tax relief. The pension rules continue to be complex and this may be announced as a simplification measure.
If you have spare cash that you are considering investing in your pension, it might be worth bringing that investment decision forward.
Possible changes to capital taxes
The Office of Tax Simplification (OTS) have been asked by the Treasury to review both Inheritance Tax (IHT) and Capital Gains Tax (CGT), which again suggests there could be tax changes happening to both which may require pre-emptive planning action.
Will CGT rates go up?
The OTS report highlighted the mismatch between CGT and income tax rates, which means that currently taxpayers are encouraged to take profits as capital rather than income. This potential opportunity has been addressed recently in the case of company liquidations, where there is now a targeted anti-avoidance rule to discourage taxpayers from disguising income as capital gains. There has also been increased scrutiny of share for share exchanges and company share buy backs by HMRC. Both of these transactions, if properly structured, can currently be taxed as capital gains instead of income. Bringing CGT rates in line with income tax rates has been touted for some time and so wouldn’t come as a huge surprise, but it means that there would be a significant rise in tax liabilities for those who are subject to CGT.
A second proposed tax change would be the reduction in the CGT annual exempt amount. This currently stands at £12,300, but could be reduced down to around £5,000 with the aim of doubling the number of people paying CGT each year. You may wish to consider making use of the current more generous limit whilst it is still there.
One further possible tax change concerns the treatment of property passing on death. Although the value of a deceased’s property is subject to IHT, there is currently no CGT to pay and there is also a tax free uplift to market value for CGT purposes. The OTS recommendation is that the value for CGT purposes should be the deceased person’s base cost. Although there would still be no CGT to pay on death, the reduced base cost would mean a larger gain and CGT liability on any subsequent sale.
We are hoping that the current business asset disposal relief that provides business owners with a 10% CGT rate on disposals will continue to apply, as this encourages entrepreneurs to build successful businesses.
Potential inheritance tax updates
The OTS has also suggested simplifying Inheritance Tax (IHT) on lifetime gifts, including reducing the period of potential exemption from 7 to 5 years. Such a tax change would mean that the donor would only be required to survive for 5 years following a gift for the transfer to be exempt from IHT.
A further recommendation from the OTS is the tightening of the conditions for Business Property Relief, by aligning the rules with the definition of a trading company for CGT. This relief currently provides 100% relief on the transfer of shares in an unquoted company. The suggested tax change would mean that more transfers of shares would potentially be liable to inheritance tax and may require a careful review of your plans if you are looking to pass on your business.
Please let us know if you would like to discuss your affairs in light of these potential tax changes, and we’ll be happy to help.