With the UK’s level of borrowing this year expected to be almost six times more than last year, at around £350bn, a cut in government spending (eventually) and tax rises (sooner) seems inevitable.
A wealth tax has been mooted but, having had all the debate around the problems it would cause for the asset rich, cash poor, talk is now about excluding individuals’ main home and pension funds, still leaving large capital values open to an annual tax.
In addition, the Government already commissioned a review of inheritance tax (IHT) last year and the recommendations from the Office for Tax Simplification (OTS) are still sitting around, an election, Brexit and the pandemic having slowed progress on any changes.
However, the OTS has also been asked to review capital gains tax (CGT) in recent weeks, so we expect actions from both reviews to be subject to some joined up thinking, together with a wealth tax, so that a cohesive plan emerges around taxing capital and capital transactions.
It won’t be enough though – IHT and CGT currently raise around £15bn, whereas income tax raises close to £200bn. So, a very large increase in capital taxes will yield significantly less than a small increase in income tax.
Increases to the top rates of income tax on dividends and on other income, and the removal of higher rate pension tax relief, at the very least would yield a significant proportion of tax. An increase to basic rate tax would be even more significant but would be unpopular. An Institute for Financial Studies (IFS) report last month suggested the UK raised a below average amount from income tax and social security (National Insurance) contributions compared to many other countries and the shortfall was mainly in the middle and higher income range, so an increase in tax towards higher income levels would seem more likely.
When could this happen? The Autumn Budget, expected in November, would be the time for the Government to scope out the direction of travel, with new tax rates applying from April 2021, although some immediate changes could be made from the date of the Budget statement.
So, what to do now?
- Consider your and your family’s income needs for the years ahead and whether any of this could be accelerated. Dividends from your company, distributions from trusts and early cashing-in of investments with income returns could all be considered.
- Think about likely capital transactions – if you are thinking of selling your business, property or other investment assets, or transferring assets within the family – all events for CGT purposes – could you accelerate anything now?
- What IHT reliefs are you relying on? Relief for business and agricultural assets currently gives 100 per cent exemption from IHT, but will it survive and what could be done now?
Now is the time to take a step back and undertake a medium-term review of personal wealth in the context of your business and personal assets and develop a strategic plan.
Action needn’t be taken until we are clear on what direction the Government will take, but if no plan is established, it may not be possible to react quickly to any changes as and when announced.
For more information please get in touch with Gary Heynes.