On 7 September 2021, Boris Johnson announced the first major tax overhaul to raise funds to support the NHS post-pandemic, and to pay for a social care reform package. The announced reforms to national insurance and the dividend tax rate are forecast to raise £14bn a year when they come into force in April 2022. However, they are not intended to specifically reduce the enormous public debt that has mounted following the pandemic (£78bn at the end of July 2021). It is therefore quite feasible that we will see further tax rises to help reduce Covid-related borrowing – and Boris Johnson has refused to rule out that this may happen during this Parliament. With recent consultations and reports in respect of capital gains tax (CGT), inheritance tax (IHT) and a potential new ‘wealth tax’, capital taxation must be a target and the industry has been braced for changes for some time. This article offers some thoughts on possible capital tax changes for individuals.
The idea of a UK wealth tax was raised in 1974 and shelved two years later – but was resurrected last year by the Wealth Tax Commission – an independent group of interested academics and tax professionals, who published their report on 9 December 2020. This proposed a one-off tax on individuals with net wealth over £500,000, with a levy of 1 per cent a year over a five-year period – forecasting that such a tax could raise £260bn.
To date, the government has not come out in favour of the idea; Sunak openly ruled it out in July 2020 and seemingly again in January 2021, commenting that such a tax would be “un-Conservative”. However, the potential efficacy of the tax as a revenue raiser cannot be denied.
Capital Gains Tax
Sunak's apparent rejection of a future wealth tax has focussed the attention on capital gains tax (CGT) as the capital tax to be drafted in to rebalance the books. The Office for Tax Simplification (OTS) has reported on the reform of CGT twice now – in November 2020 and in May 2021 – proposing wide-ranging reforms. The November 2020 report included the proposal that CGT rates (currently between 10 per cent and 28 per cent) should be more closely aligned with income tax rates (which go up to 45 per cent). It also proposed that the CGT annual exemption (currently £12,300 for individuals) be reduced and the ‘CGT-free uplift’ on death be removed. With CGT rates at a relatively low level, and the proposed ’alignment’ reform projected to raise up to £14bn a year, it does look like a rate hike is inevitable. The question is when. Sunak opted not to do so at the March 2021 Budget, biding his time with a more modest freeze on the annual exemption; however, a future increase in rates cannot be ruled out.
The OTS has published two reports into the reform of inheritance tax (IHT) – in November 2018 and July 2019 – and the All Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness produced their own report in January 2020; but so far, aside from the continued freeze on the nil-rate band (£325,000) announced at the March 2021 Budget, no major reforms have materialised.
Proposals across the OTS and APPG reports include introducing an estate tax regime for all lifetime and death transfers of wealth at a low flat rate, likely between 10 per cent and 20 per cent (as opposed to the IHT rate of 40 per cent on death); curtailing business property relief by requiring businesses to meet a threshold of more than 80 per cent trading activity as per the equivalent CGT regime (as opposed to 50 per cent); and replacing the benign seven-year rule for lifetime gifts by a flat five-year period. None of these reforms are major revenue raisers - more intended to simplify the highly complex IHT system – but, importantly, they pre-date the pandemic and the need to find funds. They also pre-date a report by the Organisation for Economic Cooperation and Development (OECD) on 11 May 2021 exploring a range of reform options to allow inheritance, estate and gift taxes to play a role in raising revenues in the future.
There are reasons why significant tax changes might be delayed or avoided, such as where the anticipated post-lockdown boom raises sufficient revenues in itself – and ‘UK plc’ is required to be as competitive as possible in a post-Brexit world. Then there is the small matter of further marginalising Conservative voters. However, with huge short-term deficits and enormous long-term national debt, it cannot be denied that funds still need to be raised. The Autumn Budget on 27 October 2021 may be too soon after the scale of the announcement on 7 September, but nothing is off the cards. Now is really the time for individuals to review their estate planning and consider taking advantage of reliefs and allowances currently available before Boris continues his ‘levelling up’.
Camilla Wallace is Partner and Head of the Private Client Group at Wedlake Bell LLP: www.wedlakebell.com...