Tax reforms to pay for Covid – what’s on the table?
As the Covid-19 pandemic continues, we have seen over the recent months that the government has had to continue to assist businesses in these tough times and introduce measures to keep the economy going (Rishi Sunak announced today in his statement that the total spending on Covid-19 so far has been £280bn). Although it is clear that it has been necessary for the government to step in and assist, the question that is now being asked on a more frequent basis is how the help given to businesses will be paid for in the long run.
Prior to the pandemic, there were a number of reports commissioned by the government on the reform of various taxes and more and more of us are becoming fearful that the government will be forced to either increase the rate of tax paid or make changes that result in greater sums being generated.
Two of the taxes that have come under the spotlight as a result of this are Inheritance Tax and Capital Gains Tax and as the government continues to implement various schemes to help businesses, the fear that changes to these taxes will be bought about is ever increasing.
In July 2019, the Office for Tax Simplification published a report with 11 main recommendations on ways in which the Inheritance Tax regime could be reformed. These included reducing the time required to run, for gifts to fall out of someone’s estate, from seven to five years but abolishing taper relief (which serves to reduce the tax paid as time goes on) as well as changing one of the tests for business property relief requiring a business to be “wholly or mainly” trading to (substantially) trading.
The report also suggested a number of other changes such as amalgamating the annual exemption, gifts made on marriage exemption and the normal expenditure out of income exemption. Whilst it is feared that some of these proposals will certainly simply the Inheritance Tax regime, it is also likely that these changes would result in additional Inheritance Tax being due.
Fast forward to January 2020 and the All Parliamentary Party Group published their proposals suggesting that Inheritance Tax should be replaced with a lifetime tax and a death tax. The APPG made suggestions on how these would work (for example, there would be an annual exemption of £30,000 when working out whether any lifetime tax was due and there would be no other exemptions or reliefs other than the spouse and charity exemption available on death.
Fast forward again to November 2020 and the Office for Tax Simplification has published another report at the request of Chancellor looking in particular at Capital Gains Tax. This report has made a number of recommendations including aligning Capital Gains Tax rates with Income Tax rates meaning that there will be a new top rate of 45%, reducing the annual exemption significantly, abolishing Entrepreneurs Relief and scrapping the “CGT free uplift” arising as a result of death.
Although the suggestions of these reports have yet to be implemented, there is a strong suggestion that this is where we are going as there are common themes amongst these reports. Indeed, because of the concerns about the need to finance the measures introduced by the Chancellor, business owners are accelerating their plans to sell their businesses; or even considering doing so when this had not been an option considered previously.
Whilst it is clear that any changes to the Inheritance Tax and Capital Gains Tax regimes will not pay for the measures the Chancellor has had to put in place on their own, these changes (to taxes that are often seen as taxes on the wealthier of society) could be the quid pro quo for any changes to more mainstream taxes such as Income Tax or VAT. There have in the past been suggestions that Inheritance Tax could potentially raise a lot more than it does for the Treasury and, arguably, changes to capital taxes such as Inheritance Tax and Capital Gains Tax are less damaging to the wider economy. Capital Gains Tax has historically been one of the most reformed taxes and it has been said that Capital Gains Tax is often used by chancellors to “make their mark” (it must not be forgotten that the current CGT regime largely stems from Alistair Darling’s time in office).
Whilst the changes to be brought in, if any, remain unclear, what is clear is that tax reforms are starting to feature much more prominently on the Chancellor’s radar and, in whatever format they may take, are potentially around the corner. With this in mind, those who have been considering undertaking tax or estate planning or have been thinking about selling their business should consider whether or not they should be taking steps now. The Chancellor’s spending review today did not focus on tax and what measures will be introduced, but the issue of how the cost of Covid-19 will be met will need to be addressed at some point; the question is when and how.
Contact our specialist tax planning lawyers in Sevenoaks, Ashford, Brighton & Hove and Uckfield
Bruce Clarke leads Rix & Kay’s Private Client Team. With eleven years’ experience of advising individuals on how to effectively manage their personal wealth, he has a detailed understanding of personal tax planning, creation of trusts and the administration of estates. Contact Bruce for more information and an informal chat about your options for estate planning. E. firstname.lastname@example.org t. 01732 440 853