Following the Chancellor’s announcement of a Spring Budget on 3rd March 2021, speculation has been rife as to what changes to the tax regime may be introduced in response to the deficit caused by increased government spending in the past year.
Whilst the pandemic continues to cause significant damage to the economy it may be too early for some of the tax increases to be introduced just yet. A recent article in the Financial Times suggested that the Chancellor was looking at an increase in corporation tax initially as a way of taxing those who are making profits, rather than bigger changes such as wealth taxes that may take longer to look at before they are introduced.
An increase to the corporation tax rate would be relatively simple in terms of the changes to tax law required to implement it. We do not know what level of rise may be under consideration at the moment but would not anticipate it being more than 2% or 3% in the current climate.
There have been reports of a review of property taxes including council tax and rates, however, it seems unlikely that this will be concluded prior to this budget.
The other potential tax rises that have been considered by various bodies (some official and some not) are as follows.
Capital Gains Tax
The Office of Tax Simplification (OTS) has previously suggested different options for changing the CGT rules, all of which would see an increase from current rates.
The most talked about change is the potential alignment of income tax and CGT rates, with CGT being charged at marginal rates. This could see CGT rates more than double from current rates in certain cases.
The OTS has also suggested a change to the 10% Business Assets Disposal Relief (BADR) rate.
Inheritance tax restrictions on lifetime giving may be introduced
Changes to IHT have long been discussed, alongside the recent recommendation of a one-off wealth tax by the Wealth Tax Commission.
In January, a cross-party report, published by the All-Party Parliamentary Group on Inheritance and Intergenerational Fairness (APPG), also called for a reduction in the current IHT rate from 40% to 10% and the removal of tax reliefs, including the potentially exempt transfer (PET).
The (PET) regime currently allows individuals to gift assets of unlimited value to family and friends during their lifetime without incurring IHT if the donor lives for a further seven years from the date of the gift.
There were also suggestions that the uplift in value of assets on death for capital gains tax purposes that currently occurs might be removed where reliefs such as spouse relief or business property relief are claimed on a death. This would mean a significant charge to CGT if the beneficiary later sold the asset.
Agricultural Property Relief (APR) is currently very generous to owners of let agricultural land as well as those who farm it in hand. The rules currently allow let agricultural land to be passed to family members free from IHT but it has been argued that the relief is being abused by investors with no intention of farming, simply to avoid paying inheritance tax. This is of course only one view of the situation – the impacts of raising inheritance tax rates on let land on the tenants of that land (possible increases in rents in future or possible impacts on the availability of land to let) should also be considered.
Whilst a reduction in IHT rates may be considered a tax saving, the removal of reliefs means that many individuals may actually end up paying more IHT in the future.
Pensions
For many years now, there has been a growing expectation that higher and additional rate tax relief on pensions will be reduced. Previous Chancellors have just not been brave enough to carry it out, it would seem. Will the pandemic be the catalyst for this change? We know this particular tax relief costs the treasury a considerable amount of money each year, which is not fully recovered by the exchequer. Will this year be the one where the relief is reduced? It seems a logical prospect, so give some thought to maximising the relief you have available while you still can. Remember, before the end of the tax year, you currently have the option of not only using this tax year’s contribution limit but also to go back and use up allowances not used in the previous 3 tax years. This can make a considerable difference to your overall pension fund and future income in retirement.
If you have any questions regarding pensions, our specialist group company Smith Cooper IFS, can help. Our highly-experienced team of Independent Financial Advisers are able to provide a far-sighted, holistic approach to financial planning – aligning our service to your individual goals, needs and aspirations. Visit the website to find out more about how Smith Cooper IFS can help you.
Tax planning – what should you be doing?
- If you are already considering making capital disposals including disposing of a business, or gifting assets, it would be advisable to conclude this ahead of the 3rd March, in case the regime is changed.
- Consider passing let agricultural property down a generation whilst both IHT and CGT reliefs are generous.
- Consider making pension contributions before 3rd March.
- Consider the impact a rise in corporation tax rates might have on your business.
If you have any queries about any aspect of tax planning and lifetime giving, we are here to help. Please do not hesitate to get in touch with our experts, who will be able to advise you on the most tax-efficient planning for your individual circumstances.
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