As expected, Rishi Sunak outlined important emergency tax changes in the government's summer economic plan or 'mini-budget' on 8 July. The key tax measures related to SDLT and VAT. However, these changes are relatively limited and focus on restarting the economy, rather than recovering the deficit. The big question remains: what approach will the government take to reduce the extraordinary level of national debt that now exists as a result of the coronavirus pandemic?
It is widely accepted that tax changes will be required in order to balance the books. We look at some of the potential options below and highlight areas where individuals may want to review their succession planning or asset holding structures in advance of potential tax changes in the Autumn 2020 or Spring 2021 Budgets.
Capital gains tax
Capital gains tax ('CGT') rates are at a historic low. The basic rate is currently 10 per cent (18 per cent for residential property) and the higher rate is 20 per cent (28 per cent for residential property).
The significant disparity between the top rate of CGT vs. the top rate of income tax, has led to distortions in the market, with some individuals able to ensure returns are taxed as capital, rather than income. This in turn has led to various tax anti-avoidance measures being introduced in recent years. An easy way to increase tax yield for the government would be to increase CGT rates, to somewhere closer to income tax rates.
Such a change in the rate of tax would be easy and quick to implement and would not require legislative drafting or lengthy consultation, which many other proposed changes might necessitate. It is also likely to be a less controversial option than some other proposals.
There are early indications that suggest CGT may well be a potential target for reform. On 14 July, Rishi Sunak formally asked the Office of Tax Simplification ('OTS') to undertake a review of CGT. The OTS has published an online survey and a call for evidence in relation to this CGT review. The call for evidence is split into two parts:
- The first part requests high-level comments on CGT principles by 10 August 2020
- The second part asks for more detailed comments on the technical detail and operation of CGT by 12 October 2020.
The scoping document provides no further clarity on the potential areas within CGT that might be the subject of reform, but Edward Hayes has considered some of the areas which may be considered in his blog post here.
This review clearly indicates that CGT is an area of interest and potential target for reform. Individuals who are considering disposing of assets (whether by way of gift or sale) in the near future, may wish to consider accelerating such disposals, to take advantage of the current low CGT rates and, in some cases, the depressed value of assets. As we mention further below, CGT rebasing on death has been suggested as a possible area of reform within the scope of inheritance tax ('IHT') .
The Office for Budget Responsibility states that IHT in its current form will raise £5.3 billion in 2019-2020. This is far less than other taxes (such as income tax, corporation tax and VAT) and any changes to the IHT regime are unlikely to make significant inroads into the national debt. But that doesn't stop changes to the IHT legislation being discussed and two recent reports have been published discussing how IHT might be reformed. The government may take the view that as some of the thinking in relation to IHT changes has already been undertaken, this provides a head start in implementing some of the suggestions from the two reports.
The first report to be published was a report by the OTS. We reviewed the key proposals in that report here. In summary, the recommendations included:
- removing the CGT uplift on death and replacing this with a no gain, no loss approach where a IHT relief or exemption applies
- increasing the trading threshold for business property relief to apply - currently relief applies if a company's activities are 51 per cent or more trading and this could be increased to 80 per cent
- reducing the 7-year rule for gifting to a 5-year rule, but removing the taper relief that currently applies when someone survives for 3 or more years from the time of making a gift
- simplifying the current exemptions and thresholds for lifetime gifting and replacing them with a personal gift allowance.
The second report to be published was by the All Party Parliamentary Group for Inheritance and Intergenerational Fairness ('APPG'). This proposed a more radical overhaul of the IHT system, including implementing a low flat rate of inheritance tax, with very few reliefs and exemptions available. We suspect that the proposals in this report are less likely to be implemented, although it is worth noting that it also recommended abolishing the CGT uplift on death.
If the CGT uplift on death were to be removed, this would level the playing field in some respects between lifetime gifting and gifts on death. Where individuals have companies that currently qualify for BPR, but may lose that relief if the trading threshold were to be increased, it is worth considering whether succession planning should be undertaken now for those assets. For example, a transfer into trust of those assets could be undertaken now without an IHT charge. This would be a disposal for CGT purposes but in many circumstances that gain could be held over. It would be worth considering, in the right circumstances, whether the gain should not be held over and CGT paid, whilst rates are low and the value of the asset may be depressed due to the current economic situation.
Income Tax, NICs & VAT
In its 2019 manifesto, the Conservative party set out a promise not to increase the levels of Income Tax, VAT or National Insurance. However, these extraordinary times might require these promises to be re-assessed.
Income tax forms the largest proportion of total tax revenue received by the government and a small increase in income tax rates significantly increases the total revenue received by the government. In May 2020, HMRC forecasted that £4.7 billion would be raised by increasing the basic rate of income tax by 1p in the pound. On a related note, higher rate pensions relief is another area of the income tax regime that the government may look to reform.
National insurance is the second biggest source of tax revenue for the government. Currently, self-employed individuals pay National Insurance contributions at 9 per cent, as compared to 12 per cent for employees. A further additional rate applies to Upper Earnings, in excess of £50,000. However, in March 2020 Rishi Sunak hinted at aligning the rates of national insurance between employers and those who are self-employed. An increase in the baseline rates could also be a possibility, as well as a change to the Upper Earnings threshold.
VAT is the third largest proportion of total tax revenue for the government and again, a small increase in rates could generate a significant amount of additional tax revenue. However, this would need to be balanced against the government's desire to increase consumer spending, so whilst a VAT increase cannot be ruled out, we consider it unlikely and it is possible that the government could opt for further (possibly targeted) reduction to the rate of VAT, to try to stimulate spending.
Finally, it is worth noting that the Institute for Fiscal Studies has just launched a study into whether the UK should have a wealth tax. Whilst this is currently at an academic stage and the study is not supported by any political party, it is certainly something that is increasingly on the radar.
The Next Steps
It remains to be seen which avenues the government will decide to pursue and crystal-ball gazing can be a futile pastime! However, in situations where individuals were already considering succession planning, particularly lifetime gifting (outright or into trust), accelerating such planning should be considered. Future changes to IHT and/or CGT could make such gifting more costly from a tax perspective and coupled with potentially depressed asset values, now may be the time to act.