The Chancellor will deliver his Spring Budget on 3 March.
With the economic costs of the pandemic mounting up, there is much speculation as to whether he will start to raise taxes now, or postpone major changes until the immediate crisis has subsided. Whilst Rishi Sunak seems unlikely to take forward the wealth tax proposals, capital gains tax and inheritance tax have recently come under the spotlight. The government have commissioned reviews of both taxes by the Office of Tax Simplification (OTS) in the last couple of years.
Capital Gains Tax (CGT)
If we see any change, CGT is perhaps the prime candidate for reform, if not from Budget day or from 6 April, then maybe from the 2022/23 tax year. CGT rates are at an historic low (with the highest rates at 20%, or 28% for residential property) and this tax falls outside the “triple lock” on income tax, VAT and national insurance. Reports suggest that Rishi will uphold this manifesto pledge and so any tax rises will need to come from other sources.
The OTS recently recommended that the government considers closer alignment of CGT with income tax rates to avoid distortion in behaviour at the boundaries of the two taxes. While it would be a bold step to raise CGT to income tax levels, we could see some kind of CGT hike, perhaps to 30%. It cannot be guaranteed that rates will rise at all or exactly when, but anyone contemplating a sale or gift of assets may want to press ahead before the Budget. For anyone already considering a trust, this planning can probably go ahead without much downside as gains can be either crystallised or held-over after the event, depending on what happens to rates. Although we have seen CGT rates change mid-tax year before, this would most naturally take effect from 6 April. That could be accompanied by anti-forestalling measures, e.g. back-dating disposals to Budget day, although without these, a flurry of disposals between the Budget and 6 April might be just the revenue raiser the government needs.
Even if the Chancellor shies away from a rate rise, revenue could be raised in more subtle ways by removing or reforming exemptions or reliefs. The OTS recommended abolition of investors relief, a reduction of the annual exempt amount, and further reform of business asset disposal relief to focus this more closely as a retirement relief. The removal of the tax-free uplift on death where an IHT relief applies has also been suggested, although this is perhaps more of a long-term measure and unlikely to help raise immediate revenue. The OTS review also highlighted the lower rates on gains attracted by family investment companies (FICs) which could signal that this area may be looked at and addressed.
The second part of the OTS review of CGT is now due and could be published at the same time as the Budget. We expect this to cover simplification rather than policy design on areas such as administration (a possible stand-alone CGT return?); main residence relief; disposals following divorce; disposals of chattels; EIS schemes and modern use of agricultural land. The take-up of OTS recommendations does not have a brilliant track-record and the government response to these OTS reports remains to be seen.
Inheritance Tax (IHT)
There has been considerable discussion on the reform of IHT through various papers, including the suggestion that the rate be decreased from 40% to 10%, but with the removal of all reliefs except the spouse exemption. Whilst it seems highly unlikely that this idea will be taken forward and raising IHT rates would be hugely unpopular, tightening reliefs and exemptions would be a more realistic possibility. The trading threshold for business property relief could be raised from 50% to 80% for example. Some tightening of the rules regarding agricultural property relief may also be a possibility, although any revenue-raising from IHT seems unlikely when an increased death rate is in the daily news. If we are to see any reform, this could be a longer-term plan, perhaps with the launch of the government’s own IHT consultation. This could be coupled with a return to the last government’s review of the taxation of trusts, the outcome of which has not so far emerged.
Further announcements are expected on the next step in the government’s review of business rates. There have also been reports that the Treasury is considering the merits of changes to council tax as well as further SDLT reform. In the short term, an extension to the current SDLT ‘holiday’ on the first £500,000 would be more welcome but there are no signs yet that this will be forthcoming. On business taxes, a rise in Corporation Tax (from 19%) has been mooted, at least on the profits of larger firms. If taken forward, this would signal a total departure from previous government policy, which had aimed to reduce CT to 17% from April 2020. Perhaps the government will instead seek to raise tax on the multi-nationals that have benefitted most from the pandemic. Another rumour that circulates before every Budget is that higher rate income tax relief may be abolished on pension contributions, although this year this appears to be a realistic option. Whatever happens, we will not have long to wait.