Without the shackles of a coalition partner, it’s possible the Conservatives may introduce some unpopular measures in this Budget, in the hope that any outrage will die down long before another election. For example, the Conservatives have said there will be no increase in the top rate of tax but could there be a decrease, abolishing the 45 per cent tax rate?
This may seem to favour the wealthy, so a more subtle way of easing the burden on the 'squeezed middle' would be to raise not only the threshold at which the 40 per cent rate kicks in to £50,000 (as David Cameron has indicated he wishes to do), but also the threshold at which the 45 per cent rate starts, from its current £150,000 point to, say, £175,000.
There could be more controversial changes around Capital Gains Tax (CGT) which could include:
- The introduction of a two tier system with a higher rate of CGT applying to ‘short term’ capital gains, perhaps those held for less than a year, or a return to a form of taper relief, whereby a lower rate of tax applies the longer you hold an asset, or aligning CGT rates with income tax rates. The latter would ensure that individuals have less incentive to realise a capital gain in preference to receiving income.
- Entrepreneur’s relief is generous as an individual has to satisfy the qualifying conditions for only 12 months prior to disposal of the business asset, and then pay only 10 per cent tax on gains up to £10m. We may see a tightening of the conditions, perhaps an extension of the qualifying period to 24 months or longer.
- Main Residence Relief could also be reviewed. The ability to sell your main residence free of CGT regardless of the size of the gain made must be one of the most generous reliefs. In the US, only a fixed amount of gain made on the disposal of a main residence is free of CGT, with the balance liable to tax. We could see the introduction of something similar, with, say, the first £250,000 of gain per person or per property free of CGT. Alternatively, we could see a roll-over system, whereby if the entire sale proceeds from one main residence are invested into another, the gain is rolled over until the next property is disposed of. This may encourage people to remain in larger properties rather than downsizing in retirement.
Finally, I think we’ll see a further increase in the inheritance tax Nil Rate Band, probably with the proviso it can only be used against the value of the family home passed to a close relative. After all, why should this extra Nil Rate Band only apply where the property passes to the children?