Tax-Year End Planning

With a vaccine hopefully bringing respite against the Covid-19 pandemic, the UK government will turn its attention to the issue of balancing the books following a year of supporting the UK economy. The Office for Budget Responsibility estimates that to meet the cost of increased government expenditure, and reduced tax receipts, borrowing in the current financial year will be £394bn. To provide some context it was estimated prior to the pandemic to be around £55bn. Whilst some of the debt will be managed through monetary policy, there will inevitably be a cost borne by the taxpayer.

The Chancellor of the Exchequer, Rishi Sunak, is expected to deliver a budget in March with his hands tied by the Conservative Party manifesto. This included a commitment not to increase Income Tax, National Insurance and VAT, the three biggest contributors to the UK economy by a significant margin, raising almost 56% of total taxes in 2019/20.

If rumours are true, Boris Johnson has insisted that this pledge be kept despite the events of 2020, and therefore expect to see tinkering, rather than wholesale change. Fiscal drag will play a part, meaning current allowances and Income Tax bands are likely to be maintained. The government had committed to broadly aligning the National Insurance allowances with Income Tax allowances although this might be shelved in the short term.

Whilst there is not expected to be a change to rates of VAT, effective from 1st Jan 2021, the ability for non-UK residents to reclaim VAT on purchases made in England, Wales and Scotland has largely been abolished. In addition, tax-free sales of goods including clothing and electrical items for UK passengers leaving the UK has also been removed.

The budget comes hot on the heels of an Office of Tax Simplification (OTS) review of Capital Gains Tax (CGT), the content of which was picked up with gusto by the mainstream press. CGT is however a relative minnow, raising just over 1% of all tax receipts in 2019/20.

Speculation is rife that rates of CGT, currently 10%, 20% and 28%, will be aligned with income tax, 20%, 40% and 45%. Simply doubling the rate in isolation will not double the tax take; holders of assets will wherever possible simply choose not to sell if almost half of their profit is paid to HMRC.

Secondly, whilst Income Tax is charged in the year in which income is received, gains can be accrued over many years and it would be perceived as unfair to tax them in the same way. Although the annual exemption, higher than in many other countries, is seen as a way of addressing this, if rates were aligned with Income Tax we may see some form of indexation or taper relief being re-introduced.

Three areas of CGT where we might see change are:

1. A reduction in the current allowance (currently £12,300). Halving the allowance would be politically acceptable given it is seen to only impact those with well above average wealth,
   but is unlikely to change people’s behaviour.
2. Removing the 10% band and tax all gains at 20%, or 28% for second homes. This would simplify the administration of CGT and is unlikely to have much impact on behaviour.
3.  Remove the CGT uplift on death. Currently when a person dies, any gains effectively die with them. It is thought investors feel obliged to hold onto assets they might otherwise
   choose to sell, and this seems a likely target for the Chancellor. Indeed, removing the uplift also allows greater freedom to increase rates, as investors will have to choose whether it is they or their beneficiaries who ultimately pay the tax.

Prior to its CGT overview, the OTS also reported on Inheritance Tax. This was followed up by a more radical paper by the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness. Both to date have been put on ice, but Rishi Sunak may choose to address this area as a means of raising additional funds.

Proposals include:

• Removal of the CGT uplift on death for assets which qualify for both the uplift and Business Relief.
• Replacing the numerous gift allowances with a single, annual exemption.
• Gifts in excess of the annual gift allowance to suffer an immediate Inheritance Tax charge of 10%.
• Reducing the period for gifts to become exempt from 7 years to 5, but also removing taper relief (which in its current form reduces the inheritance tax liability).
• Reviewing the use of Business Relief and considering whether the current rules continue to meet policy aims.
• Removal of the Residence Nil Rate Band, a complex and discriminatory piece of legislation, which is poorly understood and costly to administer.
• Like CGT however, Inheritance Tax raises relatively little for the Treasury, just £5.2 billion in 2019/20, 0.6% of total tax receipts.

Talk of complete reform of the pension tax relief system has been mooted for the past few years as it continues to favour higher earners, despite the significant reduction in the annual allowance (the maximum tax relievable pension contribution per tax year). The move to a flat rate will be seen as fairer and could, if the relief is targeted and promoted correctly, encourage lower earners whilst still providing support to high earners. Moving to a flat rate is not as simple as it might appear and would require lengthy consultation before being
implemented. That said, the wind is blowing towards change in this area.

The removal of tax-free cash is often discussed and has been for at least the past 20 years. Despite this, only Pensions Simplification in 2006 had a notable impact. The problem with the speculation is it often leads scheme members to take their tax-free cash when in many cases, this is unlikely to be in their best interests. Whenever significant changes have occurred in the past, protection has usually been enacted to secure benefits accrued. If tax-free cash were to be abolished, expect to see benefits earned to date protected in some form.

Where affordable to do so, you should consider the following prior to the Budget:

• Make use of your CGT allowances. Spouses and civil partners can transfer assets freely between each other, meaning a couple can realise gains of up to £24,600 in the current tax year.
• The threat of increases to CGT rates means there may be benefit in realising gains within the 10% band if other income permits. Higher and additional rate taxpayers may consider realising gains at 20% for the same reason.
• For those who can, consider crystallising losses which can be carried forward indefinitely to offset against gains in future years.
• Make use of your ISA allowance to protect against all taxes; individuals can invest up to £20,000 each year in any combination of cash and stocks and shares.
• For higher rate and additional rate taxpayers, ensure you are contributing as much as possible to pensions to benefit from the higher reliefs whilst they are available.
• For very high earners where pension contributions are restricted, consider the use of Venture Capital Trusts and Enterprise Investment Schemes. These types of investment are higher risk and will not be suitable for all but offer a range of very generous tax incentives.

If you would like to speak to an Independent Financial Adviser from Integrity365, please contact us on 0117 450 1300