Predictions and tax planning for Spring 2021
It has been confirmed by the Chancellor, Rishi Sunak, that the 2020 autumn budget is postponed so the next budget will likely not be until spring 2021. When we do have the budget, it is expected there will be tax rises aimed at beginning to recoup the costs of the pandemic. So, what might these tax changes be and is there anything that should be considered ahead of the budget?
To raise serious revenue, the government will need to look at raising income tax, national insurance or VAT. These would all go against their original manifesto so it is also possible they will look to other taxes such as capital gain tax (CGT), inheritance tax (IHT) and corporation tax. Realistically whatever the government decides to do, it is going to take a considerable period to recover the support provided during the pandemic.
Capital gains tax
While we cannot know what increases if any are being considered in the budget, news headlines and the Chancellors request for the office of tax simplification to review CGT, have led to speculation that capital gains tax will be brought in line with income tax rates as it was many years ago. Currently, non-residential gains are taxed at 10% and 20%, aligning the rate with income tax would see these rates rise to 20%, 40% and 45% which for additional rate taxpayers would be an increase of 25%. The residential rates are currently 18% and 28% so still a significant increase for higher and additional rate taxpayers. Scottish taxpayers will currently still be taxed at the UK rates for CGT even if the rates are brought in line with income tax.
If you are considering selling or gifting assets, both of which can be subject to CGT, you may want to ensure these transactions are completed prior to a budget in case rates are increased from the date of the budget.
The speculation could be wrong and rates could remain the same so you need to be comfortable with your decisions but for those considering sales and gifts just now, some food for thought on the timing.
A cross-party report was issued in January 2020 proposing radical changes to IHT, including a suggested reduction in the current 40% rate to 10%. This is to be balanced by abolishing most reliefs, including business relief, agricultural property relief and potentially exempt transfers (PETS). PETS are when assets can be gifted and there is no IHT due if the donor survives for seven years from the date of the gift.
When looking at the proposals, on the face of it a reduction in the rate of IHT would seem like a tax saving, in reality, with the removal of the reliefs many would pay more IHT in future not less.
There was speculation these changes would be included in the spring 2020 budget but with the coming pandemic, these were not included. Have they been discarded or will these be in the spring 2021 budget? As with CGT, if you are considering your long term tax position and possible IHT liability, it may be worth using the additional time we have pre-budget to consider your position and whether you would pay more or less IHT under the possible new rules. This will then help inform your tax planning.
Over the coming months, we will continue to review the possible changes and what planning could be considered. If you have any questions or would like to review your position, please get in touch with Lucy Crow.