If I were the Chancellor
As Jeremy Hunt prepares to present his first full Budget on 15th March, there is much speculation about what could be announced. With the next election due in under two years, time is short for the current Government to bed in further changes to the tax system pre-election. It may choose to avoid more major changes, but given the need to balance restarting the economy with coping with a huge deficit, nothing can be ruled out.
We asked our experts to discuss some of the changes that they would like to see introduced.
Aloysia Daros is concerned that high interest rates, combined with the restriction on tax relief against rental income for mortgage interest, will push up rents, and is keen for the interest restriction to be reformed.
She would also like to see tax relief introduced to help support the increasingly stringent requirements for energy performance certificates (EPCs) on rental property. Sufficiently good ratings are a legal requirement for the continuation of a rental business, and Aloysia would like the rules on what can be claimed as an income expense to be relaxed. This would tie into the Office of Tax Simplification’s (OTS’s) recent recommendation that the Government consider introducing a broader immediate income tax relief for all property costs, other than where work is clearly part of the capital cost of the building. The OTS noted that this would be simpler for landlords and HMRC to administer and would also support the Government’s objective in improving the environmental standards of rented property, by offering certainty of tax relief for those costs.
One of the most topical items that Aloysia is currently seeing is natural capital, and Aloysia would like more clarity around the accounting and tax treatment of the stages of the transaction and also the inheritance tax position of the land. It would also be useful for landowners to be provided with further guidance regarding the ability of ‘stacking’, and whether there will be the ability to continue to farm the land sensitively.
R&D tax relief is currently only available to companies, and extending this relief to partnerships would really support the farming community who often trade through partnerships.
Entrepreneurs and their businesses
The UK tax regime has become less favourable to entrepreneurs in recent years, and Toby Tallon would like to see a focus in future on celebrating and supporting entrepreneurs. While the proposed longer-term extension to the venture capital schemes’ sunset clauses is a good start, this could go further with increases to the investment thresholds.
There have been significant restrictions to business asset disposal relief, formerly called entrepreneurs relief, in recent years and this tax relief should be extended to further support entrepreneurs and potentially be tied into rollover relief.
Entrepreneurs also suffer from an inconsistent income flow, so Toby would flex the rules around annual pension contribution allowances to counter this.
The Chancellor should also ensure that HMRC is adequately resourced to run an efficient tax system, which would benefit all taxpayers and advisers, and would help to ensure that taxpayers are paying the right amount of tax.
Chris Shepard is aware that aligning rates of capital gains tax (CGT) with income tax has been floated on many occasions. While he is not supportive of this suggestion, if CGT rates were to increase, he would much prefer to see a system where lower rates applied to long term gains, with higher rates only applying to short term gains.
Chris would like to see one key change to the probate process. The requirement to pay inheritance tax (IHT) before probate can be obtained can be very tricky especially for those who are property rich but otherwise do not have significant assets or cash. While HMRC does address this to a degree by offering an instalment option, a much better solution to ease the financial burden would be to allow probate to be granted before the payment of IHT is made.
Individuals often choose to organise their financial affairs while still of sound mind, knowing that this may change in the future. While the lasting power of attorney regime is one solution, Chris would prefer a trust-based alternative. He would allow such individuals to settle assets into a trust from which they could benefit, in the hands of trustees with whom an appropriate relationship had been built, while ensuring that a fair amount of IHT was paid.
With speculation around what changes a Conservative Government may make to the non-domicile regime, or indeed what a future Labour Government would do, what Anita Millar-Neale would like to see most is clarity and certainty for non-doms.
Anita’s view is that for the UK’s domicile rules to be competitive in Europe, we would prefer not to see further tinkering with the system increasing complexity and decreasing confidence. In the past, the UK has been an attractive destination on the basis of political and economic stability, both of which have faced recent challenges. Individuals moving to the UK often contribute a huge amount to the UK economy, through paying employment taxes, national insurance, property taxes including SDLT, as well as substantial amounts of VAT through spending. After a period of time in the UK, inevitably they also pay personal taxes in one form or another. Other countries are working hard to attract people. The focus should therefore be on ensuring that the UK is more welcoming to such internationally-mobile individuals, with a clear message that it is open for business to encourage inward investment.
What changes might we actually see?
Although Jeremy Hunt may not be minded to take our wish list into account, there remains huge scope to simplify the tax system. As Chancellor, Rishi Sunak was keen to focus on tax reliefs, noting that there are over 1,000 tax reliefs and allowances in the tax system, which can also be costly and complex. We may well see some tinkering with reliefs, which we would hope would be consistent with the Government’s aim of making the tax system simpler, fairer and more efficient.
Investors’ relief is little understood and can be seen as overly generous, so could be targeted. The generous tax advantages of holding AIM shares, as well as the interaction of IHT and CGT on assets such as family company shares, have been raised by the OTS and others in recent years, and is also an area that the Government could look at.
If you would like to read more on what changes are actually announced, we will be publishing our analysis of the Budget on the evening of 15th March here.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change. Clients should always seek appropriate tax advice before making decisions.