As Government attention turns to the large deficit caused by COVID-19, there may be tax rises ahead. It is an ideal time for taxpayers to review their tax position and discuss with their advisers how they may be affected by any future tax changes.
While nobody yet knows what changes may be made or when, various recent reports have given an indication of how the UK tax system could develop. These include reports by the Office of Tax Simplification (OTS) on CGT and IHT simplification. The All Party Parliamentary Group (APPG) also produced a report proposing more significant reforms to the current IHT code. The OTS reviews were conducted at the request of the current Chancellor, so are likely to have more influence on policy making.
No major tax changes have been made during the pandemic, with the Chancellor keen not to put the brakes on economic recovery. However, it would not be surprising to see changes at the next Budget, which may be as soon as this Autumn.
Inheritance Tax (IHT)
Suggestions for IHT reform range from minor administrative points to fundamental changes. The APPG report recommended sweeping changes, including reducing the overall rate of inheritance tax, imposing an immediate tax charge on large lifetime gifts and abolishing the additional exempt amount for residential property.
The OTS reports focused more on the technical aspects but its recommendations are still significant, including abolishing the CGT uplift on death, consolidating the current array of gift exemptions, and reviewing IHT relief on business and agricultural property.
Estates are generally subject to IHT at 40% over the nil rate band, excluding spousal legacies. Lifetime gifts are currently not subject to IHT unless the donor dies within seven years, and various exemptions also apply. Although with the residential nil rate band many estates are tax free, lifetime gifts form an important aspect of succession planning. You may wish to review and discuss your succession planning with an adviser, and in particular, the timing of any gifts.
Capital Gains Tax (CGT)
The OTS has also conducted a review looking at CGT simplification. Key recommendations of the first report include aligning CGT rates more closely with income tax rates, reducing the annual exempt amount of gains and removing the CGT uplift on assets held at death. It also recommends addressing the discrepancy between profits that are withdrawn from a company and taxed as income, and profits left in a company that is then sold, which are taxable at CGT rates. If any of these recommendations are implemented, CGT bills could rise substantially for taxpayers, and many more could be drawn into the CGT net.
A second report has just been published and looked at CGT administration and technical points. Its recommendations, such as allowing divorcing couples more time to transfer assets between themselves free of CGT, and allowing taxpayers to calculate gains in foreign currencies, rather than converting sale and purchase prices separately, are practical steps to make compliance easier for taxpayers. Generally, these appear to be sensible suggestions which would benefit taxpayers if implemented.
Although the primary consideration when disposing of an asset should not be tax, those already planning to make disposals may choose to crystallise their gains prior to an Autumn Budget. CGT rates are historically low, and gains are tax-free up to the current annual exempt amount of £12,300. Transfers between spouses or civil partners are exempt from CGT, allowing taxpayers to transfer assets between them to use both exemptions.
Taxes on residential property have attracted a lot of attention in recent years, reflecting the large political interest in the housing market. Changes have included a higher rate of CGT on residential property, SDLT surcharges for non-residents and second home owners, and cuts to mortgage interest relief on let property. There are currently no specific proposals for additional changes, but alterations to the taxation of rental income and property gains, as well as SDLT and even council tax, remain possible.
Other potential reforms
An independent body attracted much press attention by releasing a detailed proposal for a UK wealth tax, but this is thought unlikely to be introduced under the current Government.
As ever, higher rate tax relief on pension contributions could be targeted, and other pension changes are possible. It is sensible not to delay any planned pension contributions.
The Government is also thought to be looking at tax differences between employment and self-employment. Reforms to the advantageous National Insurance regime for the self-employed are possible, but could be politically difficult.
In its manifesto, the current Government committed to keeping the rates of income tax, VAT, and National Insurance Contributions the same, but given the pandemic deficit, there are no guarantees.
Although tax rises are almost inevitable, given the cost of funding pandemic support, the real question is who will be affected. The majority of UK taxpayers will never pay any CGT, and the majority of UK estates do not have to pay IHT, due to the various reliefs and exemptions. Reforms that broaden the tax base, even if introduced as simplification measures, will be unpopular, and place a compliance as well as tax burden on those affected. More stealthy measures, such as failing to increase exemptions with inflation, will continue, and rate increases are possible. No major changes have been made in the most recent Budgets – the midst of the pandemic was felt to be the wrong time. As the country slowly returns to normality, we may see postponed changes coming into force.
You can read our previous article, covering tax changes on the horizon and what taxpayers could consider doing to put themselves in the best tax position, here.
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.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.