It is no secret that the Coronavirus (COVID-19) pandemic is having a significant impact on the economy. Chancellor Rishi Sunak recently stated that “it is now very likely that the UK is facing a significant recession at the moment and this year”. But the question remains: who will pay for the COVID-19 relief measures? Below we examine the possibility of tax changes on the horizon and suggests steps that can be taken now.
UK gross domestic product is estimated to have fallen by 2% the first quarter of 2020, the largest quarterly contraction in the UK economy since the 2008 financial crisis, with a 5.8% fall in March 2020 alone. VAT receipts dropped to £2.4 billion in March 2020 compared to £7.9 billion in March 2019. Following the recent Government announcements, including the extension of the Coronavirus Job Retention Scheme, the budget deficit is now expected to be more than £337 billion this year.
While the Chancellor has indicated that the majority of the deficit will be paid by borrowing, tax changes are likely. The question is where the changes will be. We have considered what indications are already available, and it seems that the potential areas for reform may include:
Income tax – The leaked Treasury document from 5 May 2020 indicates that an increase in income tax is being considered. The Institute of Fiscal Studies has previously estimated that adding one percentage point to all income tax rates would raise roughly £6-7 billion. With only £1.3 billion of that coming from an increase to the higher rate of income tax, however, the Chancellor may look to scale up the increase to 3% and 5% for higher and additional rate payers. The 2019 Conservative Party manifesto promised not to increase income tax, national insurance or VAT, but the pandemic situation, and in particular the extraordinary financial support offered to the economy, may provide a justification for departing from manifesto promises.
National insurance contributions – Given the stress the pandemic has put on the NHS, changes to national insurance contributions (NICs) seem like an uncontroversial option. Removing the NICs upper earnings limit would have a more significant impact for higher earners, and introducing contributions for working people over the pension age would add additional funding. The Chancellor has also hinted at increasing NICs for the self-employed to 12%.
Capital gains tax – The Government reduced the lifetime allowance for Entrepreneurs’ Relief from £10 million to £1 million in the recent Budget, indicating an appetite for capital tax reform. Further reform may come by way of abolition of the personal allowance, the main residence relief, a flat CGT rate of 28%, or changes to the uplift to date of death on assets that qualify for business property relief (BPR) and agricultural property relief (APR), two inheritance tax reliefs discussed further below.
Inheritance tax – Despite widespread anticipation, there were no changes to inheritance tax (IHT) in the recent Budget, so this may well be an area of potential reform. Last summer, the Office of Tax Simplification suggested reform of lifetime gifting rules, including the replacement of various gift exemptions with one larger personal gift allowance, reduction of the seven-year period for potentially exempt transfers to five years, and the removal of the CGT uplift to date of death on assets that qualify for BPR and APR. The All-Party Parliamentary Group on Inheritance and Intergenerational Fairness went a step further in its report and recommended abolishing potentially exempt transfers, subject only to an annual exemption of £30,000; abolishing BPR and APR; and removing the CGT uplift on death on all assets. These reports are an indication of direction of reform and also a growing momentum or pressure in favour of reform.
State pensions – The leaked Treasury document indicates that the pension triple lock on state pension rises may be replaced with a double lock. The triple lock mechanism currently allows the state pension to increase each year by the highest of average earnings, inflation or 2.5%. It appears likely that the 2.5% guarantee will be removed, a move that would save the Government £2.9 billion in 2021 and up to £4.7 billion a year by 2025.
VAT and corporation tax – A 2% increase in VAT would raise around £11 billion per annum, while increasing the corporation tax rate back to 20% would raise £2.5 billion per annum. With the current Government emphasis on supporting business survival and growth, however, these changes seem unlikely.
What You Can Do Now – Possible Tax and Estate Planning Opportunities
Whatever the changes may be, they likely will have a greater impact for higher and additional rate payers, and so it is worthwhile revisiting your estate plan to consider whether any action should be taken on the current rates and reliefs. Potential actions may include:
Lifetime gifting – Making a gift whilst asset values are reduced is an efficient way to pass on the asset and manage IHT and CGT. If you make a gift and do not survive the seven-year period, the value of the asset at the date of gift is the value that will be used to calculate the IHT due. Similarly, the disposal value for CGT purposes is the asset’s market value at the date of gift (subject to any CGT reliefs available), and so the level of gain will be reduced, resulting in a smaller CGT charge.
Making use of BPR – If you wish to retain control of the assets that you are giving away, then you may wish to make a gift to a trust. Transferring assets into a trust triggers a 20% IHT charge if more than £325,000 is contributed. Exemptions and reliefs are available for certain types of businesses or AIM listed shares. Where a gift gives rise to a capital gain, you may be able to claim holdover relief so that you pass on the gain to the gift recipient.
Triggering capital losses – Like many investors, you may be facing losses in your investment portfolio, so now may be the time to crystallise those losses at the current market values to offset against any recent or future gains.
Taking distributions from non-UK trusts – Now may be a good time to take capital distributions from an offshore trust in order to pay tax at current CGT rates and utilise the allowance.
The McDermott Difference
If the COVID-19 pandemic has prompted you to think about making or updating your estate plan, or if you have concerns about tax rises on the horizon, we can help guide you to a solution. If you have a question on the above, or would like to discuss possible tax planning opportunities, please contact Simon Goldring or Simon Gibb.