Tax in a crisis – how will you be affected?
Unprecedented levels of Government support to companies, employees and the self-employed – as a result of COVID-19 – are likely to come at a cost.
Despite pre-election pledges from the Conservative party of a triple lock, protecting Income Tax, VAT and National Insurance from increases, there were notable exceptions. With Corporation Tax, Capital Gains Tax and Inheritance Tax excluded, even before the pandemic, tax changes were anticipated. The question now, as national debt is at a record high, is what taxes may fall on the Chancellor’s sword in the next budget?
The UK has the lowest rate of Corporation Tax amongst the G7 countries and a modest rate of tax in comparison to other countries in the world. Even a slight increase of 1 per cent could bring in a few billion pounds of additional, much needed revenue.
Capital Gains Tax (CGT)
The UK's CGT rate is currently 20 per cent for most assets – excluding residential property and carried interest, which are charged at 28 per cent. Although this rate is not lower than many other countries, there is a significant differential when compared with Income Tax. Historically, the current CGT rate is near an all-time low. Could this signal a future rise in the rate payable on lifetime disposals and potentially bring into charge disposals on death as well?
Inheritance Tax (IHT)
For many years, HMRC has undertaken detailed analysis around the interaction between IHT, the available reliefs and how they are used, the threshold at which it becomes payable and to whom this burden most often falls. Paradoxically, HMRC's analysis indicates that the largest estates rarely incur IHT at the full rate.
There is a lot to consider and it is reasonable to anticipate increases in taxation in some shape or form. It is more a matter of where rather than when.
Is this the way forward?
In a letter dated 19 January 2018, Philip Hammond commissioned the Office of Tax Simplification (OTS) to undertake a review of what he called 'a particularly complex system'. This resulted in the OTS issuing two separate reports. The first considered how administrative matters in relation to IHT could be simplified, and the second paper considered the application of the IHT rules, which are considered below.
Whilst the Government is not bound to follow any recommendation the OTS makes, the report provides an interesting insight into their thinking at that time and the possible direction of travel for IHT, given the financial burden created by COVID-19. Below is a summary of the key recommendations the OTS made – they focussed on three key areas:
- Lifetime gifts
There are a number of categories of gifts that can be made that are immediately exempt: an annual exemption of GBP3,000, gifts in consideration of marriage (varying amounts depending upon the relationship to those marrying) and GBP250 to anyone (no matter how many gifts are made). These allowances have been fixed at this level for many years and the OTS concluded that these should be replaced with a single personal gift allowance.
- Expenditure out of income
Under current laws, gifts that are made from excess income (and are regular in nature) are immediately exempt from IHT. It is accepted that the exemption for the gifts out of income rule is complex and not widely used.
The OTS recommend that reform is required in this area. Their report suggested replacing it with a higher personal gift allowance or introducing a limit of a fixed percentage of income.
- Taper relief
Any gift (which is not immediately exempt) will be exempt from IHT if the donor survives seven years from the date of the gift. Taper relief applies from year three onwards.
Seeking to remove some complexity from the current gifting rules, the OTS recommended reducing the period for exemption from seven to five years with no taper relief.
2. Capital Gains Tax (CGT)
There is currently no Capital Gains Tax on death, and the value of assets is rebased at the date of death. If the person inheriting the asset then sells it, any gains or losses are calculated with reference to the rebased value, rather than the original base cost of the deceased. The OTS has proposed no longer rebasing at death, and this relief could be abolished given the current situation.
Their view is that this would be best addressed by amending the CGT rules – so perhaps we will see further reports from the OTS on how the current CGT regime can be simplified.
3. Business and Agricultural Property
Assets that qualify as business and agricultural property currently attract a significant relief, which results in them being exempt from the charge to IHT. This is an area that could potentially be affected.
There is, of course, a lot to consider, and right now it is reasonable to anticipate increases in taxation in some shape or form. In fact, it is more a matter of where rather than when.
Do you need help to review your finances in view of possible changes to the tax environment? HSBC Private Banking's wealth advisors can work with your Relationship Manager and Investment Counsellor to assist you.