UK tax rises for individuals: where are we now?

We would not be surprised to see a rise in capital gains tax rates (CGT) in the next 6 to 12 months. We expect a limiting of existing exemptions and reliefs within a similar timeframe

Increase in CGT rates:

• CGT is one tax that the government did not pledge not to raise when it came to power in December 2019, making it a prime target for a rise.
• The report on CGT by Office of Tax Simplification discusses a potential harmonisation of CGT rates and income tax rates. This could mean certain gains currently taxed at 20% being taxed at up to 45% for taxpayers in the highest tax bracket. Rates are a question of pure speculation, but many expect rates to rise to in the region of 30%.
• Changes to the rate of CGT impact taxpayer behaviour with an anticipated rate rise potentially leading to a windfall for the government as taxpayers accelerate disposals to benefit from the current lower rates. Taxpayers will therefore normally have warning of rate rises.
• It is unclear whether "taper relief" (a form of relief designed to provide some relief from the effects of inflation) might be reintroduced if the rate rises.
• Our expectation is that CGT rates will rise as soon as there is a perception of economic recovery combined with a perceived need to raise taxes. 

Removal of the "tax-free uplift" on death

• CGT applies on gifts between individuals. However, CGT is not payable on the transfer of assets on death: assets are inherited at market value, so that on a future disposal by the recipient, no tax is payable on any pre-death gains. This relief is known as the "death uplift" and is designed to avoid a double-charge to CGT and inheritance tax (IHT), as an individual typically pays IHT on the same transfer. This relief is therefore particularly advantageous for recipients (such as a deceased's spouse) who benefit from IHT reliefs or exemptions on death. 
• Simply removing the "death uplift" would effectively increase the burden of tax on death – as it would add another layer of tax, in addition to IHT. As an alternative (suggested in the OTS Report) a "less distortive alternative to the death uplift could be a ‘no gain no loss’ approach, where (except in relation to a person’s main or only home) the recipient is treated as acquiring the assets at the historic base cost of the person who has died". It would therefore not be surprising if the government decided to do away with the death uplift, particularly where an exemption or relief from IHT applies. 

Changes for entrepreneurs: abolition of Business Asset Disposal Relief (BADR)

• BADR (formerly entrepreneurs' relief) reduces the CGT rate from 20% to 10% on the sale of qualifying investments. It is a potentially very valuable relief for business owners and entrepreneurs.  
• The scope of BADR has been progressively narrowed over time (most recently with the reduction of the lifetime limit of qualifying gains from £10m to £1m in March 2020). There is growing speculation that it will be abolished. Indeed, BADR has often been criticised for being mistargeted. The OTS Report recommends replacing BADR with another relief which is more focused on retirement. 
• It is therefore possible that BADR will be scrapped entirely before long; the Chancellor expressed sympathy with a criticism of its being "the UK's worst tax break"  before restricting the availability of the relief to £1 million in 2020, but BADR may survive for little longer.

What can individuals do?

• Individuals concerned about potential rate rises may wish to consider accelerating triggering CGT charges or otherwise accelerating transmission of wealth. 
• Other strategies may be available depending on individuals' circumstances and we are happy to discuss further.

Reform of income tax and national insurance contributions (NICs) rates or an exceptional charge on income

• Increasing income tax rates could be a relatively quick and straightforward way to raise tax revenues, as it is one of the three biggest sources of tax revenue (alongside NICs and VAT). 
• However, the Conservative party's manifesto pledge not to increase income tax, NICs and VAT leads to our rating of this change as 'lukewarm'. In the 2021 Budget, tax rises have been effectively achieved through freezing the income tax bands and personal allowance.  We do, however, consider there is a reasonable chance of a small increase in income tax, and potentially NICs rates over the next couple of years (even if it is not in 2021). If such a change materialises, it might be presented as a separate tax such as a "temporary exceptional surcharge" on the highest earners.
• To have a meaningful impact, the increase would need to affect all tax bands – targeting only the highest earners may not prove as effective. Accordingly, in order to be acceptable to the public, at a time when so many in the UK are struggling financially, the increase would need to be small (not more than 2-3%). 
• Raising income tax and/or NICs could, however, weaken work incentives at a time when it is important to stimulate activity. One alternative might be to target dividend rates and align these to the rates that apply for other types of income. Another would be to increase NICs rates, but for high earners only. 
• There might also be some tightening (if not outright abolition) of the availability of income tax relief for individuals contributing to pensions.

Harmonisation of rates as between the employed and self-employed

• The overall income tax and NICs rate for self-employed individuals is generally less than for employees earning the same amount. There are historic reasons for the differential, such as the greater level of risk taken by a self-employed person compared to an employee, and less access to UK state benefits for the self-employed compared to the employed. 
• However, in the context particularly of the government claims to have spent £33 billion during the pandemic supporting the self-employed – in the Chancellor's own words, "one of the most generous programmes for self-employed people anywhere in the world" – some harmonisation seems likely, perhaps to be justified at least in part by the government's earlier actions. The Treasury Committee report emphasises that they consider some reform of the taxation of the employed and self-employed is "long-overdue". 
• There are various technical questions to be addressed about how such harmonisation would be achieved. For example, would it involve a merger of NICs and income tax? A move towards harmonisation does seem highly likely, but this is not a change that can be done overnight. We would expect the government to launch a consultation on reforming this area and later act on it. If a consultation is indeed launched, we would not expect any changes to be implemented before the 2022 Spring Budget.

Limiting IHT reliefs

• In July 2019 the Office for Tax Simplification published a review of IHT which, whilst not intended to make policy recommendations, considered ways in which the design of the tax could be simplified. 
• The OTS's IHT report included recommendations that business property relief (BPR) and agricultural property relief ("APR") - under which interests in trading businesses (including AIM shares) and farming assets may qualify for full IHT relief - be reviewed and reformed. In relation to BPR, this could include aligning the (currently lower) 'trading activity' requirement for BPR with that applied in CGT contexts (i.e. for holdover relief and BADR) and removing AIM-traded shares from the list of eligible business assets. 
• In the 2021 Budget, the Chancellor announced a freeze of the £325,000 "nil rate band" IHT threshold until 2026. Taking into account the effects of inflation, this is likely to bring more people within the scope of IHT and take the effective IHT rate closer to the 40% headline IHT rate for more people.
• Accordingly, we believe that the government may in coming years start looking at restricting IHT reliefs, such that it may become more difficult to claim BPR.  
• Such changes are unlikely to increase tax revenues significantly, but may be a useful political tool for the government. 

Changes in relation to lifetime giving

• Currently, an individual may gift unlimited amount during their lifetime, and, provided the individual survives seven years and does not retain a benefit in the gifted property, the individual should not be subject to IHT in respect of that gift. In addition, certain lifetime gifts are immediately exempt from IHT - for example, gifts between spouses.
• If the UK government follows the OTS's recommendations, the various lifetime gift exemptions may be replaced with a single personal gift allowance "set at a sensible level, and incorporating an increased lower threshold for small gifts". 
• In addition, the 7-year period (during which a lifetime gift may become subject to IHT) could be shortened to 5 years, and the tapered rate of IHT could be abolished. 

A more significant overhaul?

• IHT has been perceived as unfair by sections of the public for a long time, because it is disproportionately paid by members of the middle class – while the wealthiest are perceived to be able to avoid it through planning. One view is that inter-generational transfers of wealth could be more appropriately taxed by applying CGT on death (see 'Removal of tax-free uplift on death' above) or replacing IHT with a gift tax. 
• For example, an All-Party Parliamentary Group for Inheritance & Intergenerational Fairness established in February 2019 (the APPG) published a 'Reform of inheritance tax' report in January 2020 suggesting that the UK's IHT system be replaced with a flat 10% gift tax payable both on lifetime and death transfers.
• The Treasury Select Committee stated in its recent report that it believes "there is a compelling case for the reform of capital taxes". 
• Radical structural reform is probably not on the government's agenda in the medium term – but reform of IHT might be one possible response to separate calls for a wealth tax.

What can individuals do?

• Individuals should ensure that they have considered their succession plan and strategy, given that a significant reform of the regime could be around the corner. 
• We would be happy to discuss potential strategies in the view of the possible changes outlined above.

Reforming VAT after Brexit

• Until 1 January 2021, UK VAT had to operate within the parameters of EU law but since Brexit the UK has acquired greater control over its VAT system (including rates) and could, in theory, look to reshape or even abolish it. 
• However, VAT is one of the most revenue-generating taxes for the UK and given the current economic context, we do not expect any significant reform at this stage. A cut across the board of, say, 5% could be used to stimulate the economy.  Any rise would be politically unlikely since VAT more severely affects the least wealthy; in any case, the current government pledged not to increase VAT.
• VAT is generally payable as before on the import of assets (e.g. cars and artwork) into the UK and exports to the EU. 
• The Treasury Select Committee has recommended that the government use the increased flexibility it now has to consult on the VAT system and then set principles and objectives.

Increase in VAT rate

• Increasing VAT rates is likely to be an unpopular move. If any change is to be introduced, a temporary rate reduction seems more likely (in line with the VAT 'holidays' implemented during 2020 for certain businesses affected during the pandemic).

Will there be further rises? Or a 'stamp duty holiday'?

• As mentioned in our recent article  the SDLT 'holiday' was extended in the Budget, enabling potential a saving of up to £15,000 of tax for transactions completing on or before 30 June 2021, reducing to up to £2,500 of tax potentially saved for completions from 1 July 2021 to 30 September 2021. 
• The 3% SDLT surcharge for purchases of additional dwellings applies on top of the revised standard rates; the 2% surcharge for purchases by non-UK residents which came into force from 1 April 2021 also applies on top of these revised rates (and the new 3% surcharge for additional dwellings). 
• A wider reform to SDLT could be on its way before long. The Treasury Select Committee report acknowledges the widely held view that SDLT "is economically inefficient, causing damage to when and how often people buy homes. This in turn has implications for the flexibility of the labour markets and for economic activity" recommending that the government should treat SDLT as a priority for reform. 
• We would not be surprised to see a consultation launched or an OTS study commissioned into SDLT, but such a review – and implementation of any conclusions – would take some time. Between now and the Autumn, individuals may be waiting to see if any further SDLT 'holidays' are forthcoming. 

What about family offices and family investment companies?

• As outlined in our recent update, from April 2023, the main rate of corporation tax will increase to 25% on profits over £250,000. A Small Profits Rate will be created for businesses with profits of £50,000 or less, maintained at the current corporation tax rate of 19%. Businesses with profits between £50,000 and £250,000 will be taxed at the main rate but may claim marginal relief.
• These rate changes apply just as much to family or entrepreneur-held trading businesses as to family investment companies and UK family offices that hold investments. Notably, the Small Profits Rate will not apply to closely-held investment-holding companies.
• The rate increase takes the UK headline rate above the OECD 2019 Average headline rate. We therefore consider that further rises are unlikely for the time being. 
• If CGT rates rise, we may see a flight to incorporation of limited companies, in order to secure the corporation tax rate for capital gains and income from investments, instead of the (at that stage higher) CGT and income tax rates. 
• If the distinction between self-employment and employment taxation is harmonised, we expect that a review of the overall taxation of owner-managed businesses may feature as part of the harmonisation process. 

Could a "wealth tax" be introduced in the UK? 

• At present, the UK tax system targets wealth by imposing tax on capital gains (CGT) and on transfers of capital above £325,000 (IHT) – but it does not have a separate wealth tax which applies to an individual's net wealth.
• We have seen calls for an additional tax on the very wealthy increase in certain quarters, not least in certain institutional and professional circles: a 'Wealth Tax Commission' was formed by a small group of individuals in the Spring of 2020, which published a 126-page report in December 2020 setting out advantages and disadvantages of implementing an annual wealth tax vs a one-off wealth tax. 
• Overall, however, our view is that it is very unlikely that the UK government will seek to introduce a wealth tax in the current climate. The Conservative party remains opposed to such a tax. 
• We do not expect that calls for a wealth tax will go away. Look out for our separate article setting out in more detail our views on the likelihood of a wealth tax in the UK.