As opposed to our updates on the various business support measures and associated items surrounding COVID-19, this update is back to the ‘old normal’ in the form of tax updates. However, the two are clearly inextricably linked given the impact of COVID-19 on the public purse.
It was reported last week that the national debt has tipped over £2 trillion for the 1st time – a stunning, and unimaginable figure!
It feels like, ever since the start of the pandemic, there have been rumours about how the Treasury was going to pay for the various COVID-19 business support measures, and other associated required public funding, given that it was already starting from a poor position.
Some tax changes had already been considered before the pandemic struck, but some of the strongest reports came last weekend with reports of the Treasury’s plans.
As a short summary, it was reported that the following headline changes are being considered:
- The rate of corporation tax to increase from its current 19% to 24%;
- The rate of capital gains tax would increase and be aligned to the rate of income tax payable by the taxpayer – harking back to pre-2008 times;
- Removing higher-rate income tax relief for pension contributions;
- A simplification of inheritance tax; and
- Proceeding with the ‘online sales tax’.
It has been reported that income tax rises are not being considered, and that any form of ‘wealth tax’ (a more continental concept historically) is not being considered (albeit this may come by the ‘back door’ with Council Tax changes).
The reports confirmed that no decisions have yet been made, and suggested some tension between the Government and the Treasury, as you can imagine.
The way it has been reported seems to simplify things too much – suggesting that a strategy around addressing the impact of the pandemic on the level of public sector debt is a play-off between tax hikes and austerity (i.e. public sector spending cuts). Given the situation the Treasury finds itself in, it is hard to imagine that there is not going to be a hybrid of the two.
We pride ourselves on our proactive tax advisory capability, and naturally wanted to provide our thoughts and comments on the rumours, and summarise our thoughts on planning opportunities to consider given that you’d expect some of these changes to be made.
Corporation tax – Rate increase
We currently have, what many see when comparing to the corporation tax rates of other countries, as a low corporation tax rate at 19%.
It has been reported that the 24% rate (the reported new rate that would be introduced) has been chosen as it could be politically ‘sold’ to the UK business given it is the global average corporation tax rate.
For small and medium companies, the corporation tax rate hasn’t been as high as 24% since 1996, and for large companies not since 2012.
One strategy for taxpayers to mitigate the impact of increased tax rates is always to consider and maximise available reliefs and planning opportunities.
Some key planning/opportunities for companies to focus on will be:
- Owner managed business will need to review their cash-extraction strategy – the increase in corporation tax rates will increase the effective rate of drawing dividend income (as an aside, the position some found themselves in in relation to the Coronavirus Job retention Scheme may also trigger a rethink here);
- The most tax efficient form of cash extraction is by way of corporate pension contributions – this is something we always suggest clients consider – these will be even more tax efficient now;
- Maximising reliefs such as Research & Development (R&D) tax relief and deductions such as capital allowances (particularly in relation to property purchases) will be even more important – again these are points that we always raise with clients given that opportunities to claim are often missed; and
- You would assume that such an increase would take place from 1 April 2021, and as with any corporation tax rate change, timing of expenditure and accounting treatment (e.g. accruals and prepayments) will be important.
On timing of capital expenditure and capital allowances, all should be aware of the current planned reduction to the capital allowances ‘annual investment allowance’ on 1 January 2021, which can cause unexpected shocks for some if not well advised.
Capital gains tax – Rate increase
Many will recall that capital gains tax rates were aligned to the rates of income tax in pre-2008 times – when the flat-rate change (then 18%) was introduced, which has then morphed to the 10/20% rates for non-residential property, and 18/28% rates for residential property.
In pre-2008 times, there was ‘taper relief’ that reduced a gain that was then chargeable at the taxpayer’s marginal income tax rate. This had the impact of reducing the effective rate. It will be interesting to see if a similar relief would be introduced.
Even before these reports at the weekend, many in the profession were predicting capital gains tax rate increases. Given the relatively low tax take from capital gains tax, and the associated cost of administration, it was always our thoughts that the rate would need to increase.
Pre the 2008 change (where, whilst the overall capital gains tax rates reduced, the favourable 10% effective rate (due to so-called ‘business asset taper relief’) was rumoured to be being abolished – which would have represented an increase in the rate for those qualifying for that relief), many engaged in planning to crystallise gains before the change. This will obviously be a planning strategy for those concerned by the rumoured increase in capital gains tax rates – there are a number of ways of doing this.
As well as the increase in headline capital gains tax rate, whilst not reported at the weekend, we also feel that capital gains entrepreneurs’ relief will be abolished – after the lifetime limit was cut to £1m (from £10m) in the last Budget. This would see the end of the 10% rate for those qualifying for the relief. Again, crystallising the benefit of the relief will be a priority for those that are concerned by the abolishment of the relief.
It seems an anomaly that capital gains investors’ relief was left untouched when the capital gains entrepreneurs’ relief lifetime limit was reduced. It will be interesting to see if investors’ relief continues in its current guise, and if so, it will be a new focus for many (since the entrepreneurs’ relief changes, we have been providing a lot of advice here).
Other focuses prompted by any capital gains tax rate increase will be:
- The importance of considering the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) for investments in shares in unquoted companies – qualifying investments can qualify for capital gains tax exemptions on the shares themselves, and deferral (and exemption for SEIS) of other gains that are deemed to have been reinvested; and
- Taxpayers may wish to consider to hold assets in a limited company – attempting to access the lower corporation tax rates (subject to any form of new ‘taper relief’) and corporation tax relief such as the ‘substantial shareholdings exemption’.
Pensions – Higher-rate relief
Change has been rumoured for a while, and various guises of change have been mooted.
The planning focus here will be merely to bank higher-rate relief on contributions whilst it is available.
Inheritance tax – Changes
For a number of years now, we have been advising clients to be wary of inheritance tax changes.
We then had the Office for Tax Simplification (OTS) report and recommendations last year, where Steve Maggs, Tax Partner, provided his thoughts in his blog (here), and other suggestions for more radical change by the All Party Parliamentary Group on Inheritance Tax and Intergenerational Fairness (which Steve also commented on – see here).
Our prediction is that the OTS recommendations will be followed, as opposed to the radical changes recommended by the Parliamentary Group.
Given this, our advice to clients is (and has been for a while):
- Attempt to bank/crystallise inheritance tax ‘business property relief (BPR)’ where assets currently qualify;
- Review assets that are currently qualifying for BPR and consider whether the suggested changes (particularly to the ‘wholly or mainly’ tests) will result in the loss of BPR, and further review the associated impact on the exposure to inheritance tax;
- Review assets that are currently qualifying for inheritance tax agricultural property relief (APR), and again consider whether the suggested changes (namely loss of APR on let agricultural land and property) will result in the loss of APR, and further review the associated impact on the exposure to inheritance tax;
- The recommended loss of capital gains tax base cost uplift for assets qualifying for inheritance tax reliefs will mean more of a focus on lifetime planning, where there hasn’t necessarily been an incentive to do so whilst the uplift has been in existence; and
- A reduction of the 7 year period for lifetime gifts to 5 years will place more emphasis on lifetime gifting.
If we can help and advise you in any way, please get in touch with your usual RRL contact, we continue to largely work remotely. We will respond to emails as usual. We are conducting meetings virtually (using Microsoft Teams) albeit face-to-face meetings can be arranged by pre-appointment conditional upon our meeting policies being agreed and adhered to.
As ever, we will provide further updates, as and when further announcements are made and detail/guidance released.