Clearly COVID-19 presents immense challenges for the UK economy.
In this article we look at the potential impacts on taxation in light of Rishi Sunak’s recent spending review and the implications these may have for your own tax planning.
Now may seem an inopportune time to be thinking about tax planning, as we face the health and economic impact arising from a resurgence of the COVID-19 pandemic. As we write this, lockdowns remain in force, with the prospect of new tiers from early December. We trust that you and your loved ones remain safe and well.
The enormous, and increasing, financial cost to the state is currently being met largely from government borrowing, as the statement by the Chancellor on 25th November made clear. However, it seems highly likely that steps will be taken to increase tax revenue, when the worst is behind us. One aspect for policymakers’ consideration will be inter-generational fairness, to distribute the cost between current and future generations: an ongoing political dilemma whichever party is in power.
With other matters taking priority at the moment, and the budget planned for November being cancelled in favour of a statement focusing on government expenditure, we thought it would be a good time to provide some of our thoughts on potential changes to tax in the future and how that could impact your financial planning.
We think that capital taxes are a probable target, given the Chancellor’s limited flexibility elsewhere. Two of these, in particular, impact many of our clients. Revisiting financial plans in the next few months could prove prudent if you are concerned about potential tax changes.
Capital Gains Tax
As highlighted by a newly released Office of Tax Simplification review, this is currently a relatively generous regime, with a top rate of tax for investment gains of 20% and 28% for certain residential property. With income tax rates of up to 45% in England and Wales, and 46% in Scotland, there is an argument to be made for bringing these two regimes much closer together. Capital taxes are unlikely to be lower in the near future.
Making use of available allowances and other ways to mitigate tax on gains, in conjunction with your accountant where appropriate, could be beneficial where active management of gains is possible.
Investors should not be afraid to pay some taxes along the way, particularly if values are depressed and gains are lower.
If there are losses, it may also be appropriate to crystallise these as current rules allow losses to be carried forward and offset against future gains.
This has been under review for some time. While a separate Office of Tax Simplification review has also proposed various changes here, the regime has remained largely the same since being introduced in 1986. It is a complex tax, relative to the revenue currently being raised.
The main allowances and exemptions have been frozen for many years, making this area ripe for reform. However, as a short-term measure for raising significant additional revenue, scope appears very limited. Business Relief may well again receive attention to ensure this remains focused on encouraging high-risk, entrepreneurial investment within the spirit and intention of the original rules.
There would, however, probably need to be a more radical change into a wider Wealth Tax to make a significant difference. This could be politically unacceptable, although a number of other countries have gone down this route.
If you are intending to make gifts anyway, and can afford to do so, the sooner you do so the sooner the value will be outside of your estate for Inheritance Tax purposes. We can provide guidance on an affordable level of gifting and how to meet your objectives in the most effective way.
Income and Corporation Tax
The rates for Income Tax seem to be set for the duration of the current government, although we may well see a continuing freeze on the personal allowance. This has remained at last tax year’s level of £12,500. Freezing this allowance is an indirect way of raising income tax without the same headline-grabbing effect as an increase in the rate of income tax.
Over the long term, increasing the rate of income tax is probably the most effective way of raising revenue, although may not be politically acceptable. However, we do not think this should be ruled out, given the size of the financial burden caused by the pandemic.
A planned reduction in Corporation Tax, from 19% to 17%, was deferred in the March budget. With many businesses suffering significant financial stress, there is an argument for proceeding with the original intention, as a short-term boost. Longer term, however, this rate could well increase beyond the current level. The Government could also revisit the various ways companies currently reduce their tax bill. Investment analysts will be watching this area diligently, here and overseas.
We feel it is also worth mentioning another area which we could well receive the careful attention of the Chancellor.
Pension Tax Relief
This is a very expensive relief for the government. It is particularly beneficial for higher rate taxpayers, as relief is currently at the pension contributor’s marginal rate of income tax. While this would also be politically challenging, in our view a restriction in such relief is on the ‘possible’ list, either directly or by further limiting the scope for contributions.
To look at this another way, pension tax relief is highly unlikely to become more generous than its current format, at least for higher rate taxpayers. If the income tax personal allowance remains frozen, a pension contribution could become even more tax efficient. A word of caution, though: changes to the taxation of pension benefits mean that it does not make sense for many clients to add to their pension savings. Where it does, careful consideration should be given to making a tax-relievable contribution during the current tax year, and potentially in future years too. Taking advice is essential in view of the complexities of the pension regime.
A Final Thought
A significantly weakened economy is not in a good place from which to extract large amounts of additional tax. Clearly, no one knows what the future impact of the pandemic will be, although the enormous human and financial cost is becoming clearer.
Tax reliefs have been squeezed since the Great Financial Crisis of 2008 and are now likely to be squeezed further due to the pandemic. The tax treatment of different assets will depend on the circumstances of that individual, and as you can tell from above, rules can, and will, change. Utilising available allowances and other tax saving opportunities is now an even more important aspect of financial planning.