The Future Direction Of Tax
Whilst we are seeing the current health and wellbeing effects of COVID-19, the financial impact of the various emergency support measures provided remains uncertain. However, we all know this is going to be expensive and the purpose of this article is to assess what the impact of future tax changes might be.
You’ll be aware that the Chancellor, Rishi Sunak, postponed the Autumn Budget scheduled for November 2020 and our expectation is for a Budget in March 2021. Furthermore, as we previously discussed, the Chancellor also requested that the Office of Tax Simplification (OTS) carry out a review on the workings and basis of Capital Gains Tax (CGT) in July.
The OTS have recently published their review and it does not look favorable for this typically generous tax. Given what we know, and the clarity provided from the OTS report, it is anticipated that the government’s initial target will be on perceived wealth and therefore capital taxes, i.e. CGT and Inheritance Tax might be in the firing line. So, what could expect to see over the coming months?
Capital Gains Tax (CGT)
The OTS report recommends some major changes to CGT including increasing tax rates and removing Business Asset Disposal Relief (formerly Entrepreneurs Relief). Some of the measures that we expect might happen are:
- The removal of the CGT annual exemption, currently £12,300
- A general increase in CGT rates
- The removal of certain CGT reliefs
- The alignment of CGT rates with Income Tax rates (possibly 40% or more)
The final bullet point would potentially cause the biggest problem given that the highest rate of Income Tax is currently 45%, some 17% higher than the highest current rate of CGT (28% on residential property).
Inheritance Tax (IHT)
In the last two years, HMRC have undertaken a series of consultations into IHT. IHT is a tax on death, relating to the wealth passed down generations so this is very much of relevance to taxpayers. In UK terms, IHT generates very little revenue when compared to Income Tax and Corporation Tax and it is also relatively complex to calculate, with reams of case law arising from it.
We believe that the government might remove some of the reliefs that assist in planning for IHT (such as Business Property Relief and Agricultural Property Relief) or if they are feeling more radical, they could scrap IHT and replace it with some form of wealth tax. Any changes in IHT are likely to detrimentally affect business owners and wealthy individuals so assessing your current position is critical.
Income Tax and Corporation Tax
If we look at what else could be possible in relation to Income Tax and Corporation Tax, we anticipate some of the following changes:
- An increase in the highest rates of Income Tax, currently 45%, increasing to 50% or more
- The raising of Corporation Tax, currently 19% – rumour has it that the government was considering raising the rate to 24% but backtracked, at least for now
- A higher rate of Corporate Tax for investment companies, including buy to let companies
- Further clamp downs on perceived tax avoidance
- A tax on undistributed profits in close companies
- Scrapping of the £2,000 tax free dividend allowance
Other measures possible
- On online sales tax to combat perceived profit shifting from online businesses
- A further restriction on the tax relief on pension contributions
- Some targeted tax reliefs for certain sectors such as agriculture
The above paints a largely negative picture of the potential tax rises we all face. However, it’s not all doom and gloom, and we believe that, with good planning and forward thinking, the effects of the likely tax increases can be mitigated. Our EQ Taxperts would be happy to discuss your position and offer our advice and support. With the expected changes and next Budget likely circa 3 months away, there is time to make some changes now, that might save you tax in the future.