Almost all of us are conscious of the fact that Coronavirus is costing the government eye watering amounts of money and with expectations that the virus could lead to a recession it seems likely that it will continue to cost money for some time. Add to that the fact that even the most ardent pro Brexit economist seems to think that, in the short term at least, Brexit is also going to impact on GDP, and it is clear that government finance is going to be under pressure for a little while. For the present the Chancellor of the Exchequer has said he does not want to take action but it cannot be long before something happens.
How could the government seek to raise money?
With this in mind what are the ways in which the government could seek to raise the money they need to finance these costs and also their ambitious plans to improve the Health Service and even up the country. Here are the most probably solutions.
- Borrow money, this is what has been done to date, 25 year interest rates are very low and this has made borrowing relatively easy. While the writer does not claim to understand government finance in all its detail it is his understanding that because of the very low lending rates the impact of interest on Annual expenditure likely to be quite small, one estimate that the writer has heard is 1% of GDP. But even 1% is significant and means any new government is inheriting debt.
- More Quanative easing by the Bank of England. This has already been done but in essence this is printing money and it has an impact on inflation. Furthermore the Bank of England is supposed to be independent and might refuse to keep doing this.
- Raise taxes.
What taxes could the government look to raise?
Current indications seem to be that the Government will in so far as it is able, use a bit of all three of the above solutions but we want to focus on what taxes it could raise. We shall start by looking at the low hanging fruit that could easily be used.
- Harmonise taxation of Dividends with other income, current rates 7.5%, 32.5% and 38.1%. Having got rid of the tax credit a few years ago the reduced rates are a sort of nod to the old tax credit, but why not collect a bit more tax and just tax at the same rates as other income.
- Harmonise Capital Gains Tax (CGT) and Income tax (IT) rates. Current IT rates are 20%,40% and 45%. Current CGT rates are 10% and 20% for ordinary gains AND 18% AND 28% for Residential Property. The Office of Tax Simplification (OTS) has just submitted a report to the Chancellor recommending this. There is no doubt that the current differential rates can distort taxpayers behaviour with schemes to try and treat income as Capital Gains. However CGT has always been regarded as a tax on inflation and this sort of change could generate a lot of opposition.
- Look at Captial Gains Tax exemptions. Should the free CGT uplift always apply on death? It has been suggested that if there is Inheritance tax (IHT) exemption then instead of free CGT uplift there should be automatic hold over relief for Business Property and Agricultural Property. Both the OTS and an all-party Parliamentary Report have highlighted this and other inconsistences in the law, the author has written previous articles on both.
- Tighten the rules for the availability of Agricultural Property Relief (APR) and Business Property relief (BPR) from IHT. Currently it is sometimes possible to obtain these reliefs for businesses that were not originally intended to benefit and there are financial advisers selling specific BPR investments which are little more than mere IHT planning vehicles.
- Look at simplifying and tightening up some of the IHT exemptions such as Normal Expenditure out of income and Potential Exempt transfers.
- Look at tightening up the IT reliefs for pension contributions and consider if pension pots should escape IHT on death?
- Reduce ISA allowances which enable people to shelter large sums of money and Capital gains from tax.
- Moving away from personal taxation the Chancellor could also look to increase Corporation tax.
In my opinion these are the easy targets, although for every argument in favour of the above suggestions there will be a vociferous counter argument. The other problem with most of the above suggestions is that while they will undoubtably raise tax the amounts may not be huge in relation to what is needed. Here are some other suggestions that are a bit higher up the tax tree. Many of these are however the difficult ones either politically or technically or both.
- Increase the basic rate of income tax by 1% or 2%. This would be technically quite easy and would raise large sums of money but it would be breaking an election promise.
- Raise VAT by 1% or 2%. The same comments apply to this as to any rise in the rate of income tax.
- Harmonise Income tax and National Insurance (NI). It is argued that the differential between IT and NI is not logical and benefits the older members of society who currently hold most wealth.
- Introduce a new Wealth tax; there is quite a lot of talk about this at present but we already have two/three wealth taxes (IHT/CGT/SDLT) and wealth taxes have proved notoriously difficult to administer/make work. Few countries use wealth tax and some countries that have tried them have abandoned them.
- Raise IHT rates. Like other possible changes to IHT the amount this would raise is probably not huge but it would appeal to those who see this as a tax designed to even things up. It is likely that it would be highly controversial and unpopular.
- Introduce a new income tax, for example might it be possible to have a targeted income tax such as an investment income surcharge, essentially a tax on savings. This was tried by the Labour government of Harold Wilson in the 1960s, it was very unpopular and generally regarded as a failure but….
I am not necessarily advocating any of the above but it seems likely that one or more of these measures will be adopted and the question we all have to ask ourselves is whether there is anything we can do to plan for these. We are not suggesting any sort of tax evasion, nor at the end of the day is it going to be possible to avoid all the measures that are likely to be taken by the Chancellor. But with a bit of thought it may at least be possible to reduce the impact of measures that are introduced.
Considerations for Income Tax and Capital Gains Tax
Starting with IT and CGT what actions should you consider? In the short term the following steps should be considered:
- Max out on your ISA allowances.
- Max out on your pension contributions
- Consider splitting potentially taxable assets equally between couples
- Ensure that your annual Capital Gains allowances are used each year. With the threat of a doubling of CGT rates it may even be worthwhile realising excess gains between now and 5th April 2021 in the hope of paying a lower tax now.
Turning now to Inheritance Tax here are a few actions that are worth considering:
- If you can afford it make some gifts of surplus capital to your children.
- If you can afford it make sure you are using the normal expenditure out of income exemption.
- Think about whether it is worthwhile investing in assets eligible for BPR, this could be a victim of legislative change so it is a route that would require careful thought.
- Consider if you can share property (usually a second Property) with your children
- If you have inherited or expect to inherit in the near future it may be worthwhile passing your inheritance onto your children, this needs careful advice.