Budget 2021: Taxing questions

On Wednesday, the chancellor will deliver his first budget since announcing the historic levels of support to business and individuals affected by the pandemic. While we’re a long way from being back to normality, the question of how government revenues can be rebalanced will need to be addressed.

Irene Wolstenholme, Director, Wealth Advisory Services at Coutts, says, “While tax rises in some form are a distinct possibility in the future, we’re not expecting big announcements on tax in this budget. Furthermore, the chancellor has made it clear that he will stick to the ‘triple lock’ on taxation that was in the party manifesto published before the last election, meaning no rises in the rates of income tax, national insurance or VAT.”

As ever, there have been numerous ‘leaks’ and rumours circulating about what might be announced. One significant possibility is a potential freeze on the Lifetime Allowance that sets the maximum amount you can have in your pension pot when you start taking money out without incurring additional taxes. If this comes to pass, then it could be worth reviewing your pension arrangements to make sure you don’t get caught out.

Other ideas that have been floating around include an extension of the Stamp Duty holiday and a potential rise in corporation tax. The chancellor also announced a ‘tax day’ on 23 March when he’ll publish a number of consultations on tax, which will bring some clarity to future moves on tax. 

In advance of this, recent initiatives provide an indication of the direction of travel, but reading these runes is not an exact science. Irene cautions, “Government is continually considering tweaks and changes to the taxation system. It’s important to remember that not all of these ideas make it to the statute books. And even if they do they can be very different from what initial reports suggest. While foresight can be helpful, it could be a big mistake to take action before proposals become legislation.”

Making CGT simpler and fairer

In July 2020, the chancellor of exchequer commissioned the Office for Tax Simplification (OTS) to review Capital Gains Tax (CGT). The remit of the review was “identifying opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent”.

The OTS has split its report into two parts. Their first, on policy design and the general principles of CGT, was published on 11 November 2020. You can find it here. The second part will look at technical and administrative issues and will be published later in the year.

Irene says, “The news headlines around this report have generally focused on the proposal to align CGT rates with income tax rates. But these proposals don’t exist in isolation.”

She points to the report’s suggestion that, if the rates were aligned, then the government should consider reintroducing some sort of relief for inflationary gains. This would be reminiscent of the old ‘indexation allowance’ – allowing capital losses to be used more flexibly. “This would go some way to addressing some of the issues that have been raised by the suggestion of alignment,” she says.

But more importantly, this is not the only recommendation of the report. For example, if government decides not to align rates with income tax, the report raises the possibility of reducing the number of rates so that liabilities would be easier to predict.

Another suggestion would see a reduction in the Annual Exempt amount, currently £12,300. If the point of this is to create a de minimis figure – a basic low level of gains that wouldn’t be subject to tax – then a smaller figure, maybe in the range of £2,000-£4,000, could be enough to allow for relatively trivial gains.

CGT and inheritance

The report also considers CGT and inheritance. Currently, when assets are passed on at death, the people inheriting them do so at the market value for the purposes of CGT.

The report argues that this causes distortions in behaviour and suggests that the base cost for CGT should be the cost to the original owner. In fact, this is one of the recommendations of an earlier report the OTS compiled about Inheritance Tax in July 2019.

“It’s important to understand all the measures being suggested. While drawing out one element can make good headlines, it’s not always an accurate reflection of what’s being proposed,” says Irene.

should there be a wealth tax?

Irene notes that proposals can also come from outside of government. For example, the UK Wealth Tax project, a collaboration between Warwick University and the London School of Economics launched in Spring 2020. It has set out to answer the question ‘Should the UK have a Wealth Tax?’

“The Wealth Tax Project received a range of interesting evidence papers that show the direction of current thinking around the sometimes-controversial topic of taxing wealth,” says Irene. “Their final report, published on 9 December, is a thorough examination of the issue.”

The initial report and extensive suite of evidence papers can be found here.

Tax and your financial plans

With so much news flying about it can be tempting to make changes to your finances to mitigate potential exposure to additional tax risks.

Irene’s view? Don’t panic.

“Putting additional financial pressure on business and consumers is the last thing the chancellor will want to do in the early stages of the recovery,” she says. “He’ll want to see solid and sustainable growth before making any big changes.”

In the longer-term view, gains from overly complex tax plans can be marginal in relation to your own personal financial goals.

“Take the latest CGT report as an example,” she says. “Even if you think there’s likely to be a rise in CGT or other taxes, remember that your investments should be based on your broader financial plans rather than a focus on tax.”

Once you have a clear idea about this, there are some basic tax efficiency steps you can currently take. For example, don’t forget to use the tax efficient allowances available to you each year – ISAs, pension contributions and so on. You could even consider using your CGT allowance each year to sell some assets and re-invest the money through an ISA.

But beyond these, there are many questions when considering changes to the way your investment assets are structured, and tax can be a relatively minor consideration. To make sure you’re making the best use of your assets, we would suggest contacting your wealth manager to discuss the options available to you.

This article does not constitute financial advice. The value of investments, and the income you get from them, can go down as well as up and you may not back the amount you invested. Tax reliefs referred to are those applying to UK residents under current legislation, which may change. The availability and value of any tax reliefs will depend on your individual circumstances.