It's time to talk tax

Investment & Wealth Advice

Are you making the most of your 2020/21 tax allowances?

Clare Munro, Senior Tax Adviser

Over the past week or so, the press have allocated plenty of column inches to speculation about tax rises in the forthcoming Budget, expected in November.  Whilst we would never suggest our clients take commercial decisions on the strength of a tax rumour, at least part of the press gossip appears to come from a long lens snap of Rishi Sunak’s notes so we think it’s worth pausing to consider the potential issues.

What is being said?

The rumours currently in circulation include:

  • Abolition of the pension triple lock
  • Corporation tax increase from 19 to 24%
  • Flat rate of pension tax relief (originally suggested by George Osborne at 30%)
  • Increase dividend tax to main income tax rates
  • Online sales tax
  • IHT modernisation
  • CGT reform

What would that mean?

For various reasons none of these ideas provides a neat solution to the large hole in the national budget and some have the potential to cause ructions within the Conservative party:

  • The pension triple lock was a manifesto pledge and, despite the dramatic shift in the nation’s economic fortunes since it was made, it’s understood that the Prime Minister is reluctant to break it.
  • Corporation tax rises would be seen as bad news for business at the very time when the recovery from Covid needs to be encouraged.
  • Pensions have been the subject of much fiscal tinkering for decades and so should perhaps be left well alone.  Nevertheless, a further reduction in pension contribution relief, which would affect a relatively wealthy few, could be seen as a continuation of an existing trend towards aiming relief at average earners.
  • Lower taxes on dividends than other forms of income are justified on the basis that the company has already paid tax on the distributed income.  Increases could also be seen as discouraging the small businesses that create so many jobs.  However, HMRC remain of the view that there is an unlevel playing field between directors paid a salary and those taking dividends.
  • An online sales tax might stem the flow of trade away from the high street but could be seen as regressive, having most impact on those least able to afford it.  The business community is likely to oppose it too.
  • IHT is based on old legislation and has already been reviewed by the Office for Tax Simplification and a cross-party group of MPs.  Rishi Sunak made no changes in March but may feel now is the time.  The problem is that it doesn’t raise much revenue.

And what about Capital Gains Tax (CGT)

And then there is capital gains tax which is under review by the Office of Tax Simplification at the moment.  Like IHT, the problem with CGT as a means to mend the hole in the budget is that it doesn’t really raise much tax - £9.5bn in 2018-19 from total tax receipts of over £600bn.  It’s more lucrative than IHT, but falls well short of the big three – Income Tax, NICs and VAT.  However, capital has generally been taxed more lightly than income, so CGT has political value in providing a deterrent to taxpayers who may try to convert or recharacterise income as gains.  Also, increasing a tax generally paid by a few wealthy people could be seen as reasonable in some quarters.

What might the changes to CGT be?

So, several CGT changes have been flagged up as candidates for a November Budget:

  • At £12,300 the threshold for CGT is generous by comparison with, for example, the dividends or savings allowances.  It could be slashed to limit the level of permissible tax free gains. 
  • Similarly, for the higher rate taxpayers likely to be affected, gains are taxed at lower rates than other investment returns –20% for general gains by contrast with 32.5% or 38.1% for higher and additional rate payers receiving dividends.  As historically reliable dividend-paying companies cut their payouts in the wake of the Covid crisis, investors may be looking for returns in the form of capital just as the tax rules are changed to increase the Exchequer’s share of any gains.
  • Gains could be taxed at the same rate as income – this has been tried before, albeit with a taper relief to assist long term investors.
  • The ability to sell one’s main residence tax free has been regarded as immune from criticism or abolition, but the government has been making gradual inroads on it with the reduction in the exemption for the final period of ownership, first from 3 years to 18 months and then halving it again to 9 months.  It’s not impossible that this once unshakable rule could be eroded further, although it seems counterintuitive given the current stamp duty land tax holiday to encourage the property market.
  • The value of Entrepreneurs’ Relief (now Business Asset Disposal Relief) was reduced by 90% in April so one might hope that what’s left is here to stay, but as there is doubt about whether the relief motivates entrepreneurs, there can be no certainty.
  • The ultimate capital gains tax break is on death when one’s assets are uplifted to market value, regardless of whether any inheritance tax was due on them.  The OTS has previously suggested unwinding this system and now may be the best opportunity they’ll get.

What can we expect on Budget day?

Budget predictions are notoriously hard to call, and Rishi Sunak has somehow to balance the Conservatives’ reputation as the party of low taxes against the government’s need to demonstrate economic competence and fiscal prudence.  In the interests of the latter, it’s reasonable, although by no means a certainty, that there will be tax increases and, given the problems with most of the other options, CGT is arguably a good place to start.  If the Chancellor agrees, it’s possible that any changes will take effect from Budget day.

As an investor, what action should I take?

At Weatherbys Private bank, we offer financial planning and investment advice.

For an investor, translating those thoughts into action is difficult, but whatever happens in November, it’s likely that the current tax rates are the lowest we will see for a while.  So, for anyone looking to dispose of assets or increase liquidity, bringing forward the date of disposal is unlikely to be a bad move in purely tax terms.  Similarly, for those in a position to do so, making pension contributions now, on the basis of a known tax relief system, could be a smart move.

Do get in touch with our Investment & Wealth Advice team today to find out if we can help you plan for the future.


Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

Tax laws are subject to change and taxation will vary depending on individual circumstances.


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