Rishi Sunak is planning to give a Budget on 3 March 2021, and it is expected that there will be changes to various taxes including capital taxes included in that. There is some published information to base thoughts on possible changes and it is worth giving this some consideration.
Inheritance Tax
There are two main sources of information to consider here as follows:
- All-Party Parliamentary Group on Inheritance and Intergenerational Fairness (APPG) which published its report “Reform of inheritance tax” in January 2020
- The Office of Tax Simplification which published the document “Capital Gains Tax Review: Simplifying by design”
The APPG has been considering in the round what is fair for capital taxation. Its main proposal seems to be to reduce the amount of intergenerational transfer of assets where there is no tax charge. Their suggestion to achieve this is to have an annual exemption for gifts of around about £30,000 and for there to be an immediate tax charge of around 10% on the value of gifts above that.
What is now the nil rate band of £325,000 would be called the ‘death allowance’ and this would only apply on death. The group considered a rate of 40% to be excessive but instead would be looking at a rate of between 10% and 20% on the basis that this would be a low enough rate for the tax to be broadly based without the need for complex reliefs. This would go along with an abolition of agricultural and business reliefs on the grounds that a 10% rate spread over 10 years, i.e. 1% per year could be paid annually out of net income and would be seen to be fair. In any event any relief for trading is likely to be pinned to an 80% test rather than a 50% test as is now the case for inheritance tax.
This leaves open the question as to how trusts would fall into this as there was no death, and the answer would probably be an annual charge which like the 10 year charge we have now would seek to equate the inheritance tax in the trust to that of a human life.
The main residence nil rate band is seen as an unnecessary complication and I would expect this to be abolished in the budget.
Capital Gains Tax
As far as capital gains tax is concerned the suggestion in the APPG report which has resonances in the Simplifying by design report is to take away the probate value uplift on death. The APPG goes further here in that they do link this to IHT relief is that so this would apply in all cases, whereas in Simplified by design the office of tax simplification consider only taking the probate value uplift away where an asset has been exempted from inheritance tax either by way of agricultural or business relief.
There is broad agreement within the profession that the rate of capital gains tax is likely to be increased from the current rates of 10% and 20% in (18% and 28% for residential property) to the rate of income tax which are 20% 40% and 45%. It has always been my view that such rates would be unfair as capital gains include an element of inflation. The Simplifying by design report meets this question by introducing the concept of an inflationary relief, which would take us full circle back to where capital gains taxes were until 2008. The thinking behind having capital gains tax rates around half of income tax rates is to give a broad brush relief for indexation while keeping the walls simple, and this is the reason that many jurisdictions have a lower rate for capital gains tax as compare to income tax.
If a sale of the assets was imminent, I would advise the tax payers to consider entering into some planning, for example a contract for sale that is left uncompleted. However, if a sale is unlikely I would advise against such action as this may just cause more complications.
Income Taxes
Dividends are taxed at the rate of 7.5% in the basic rate rising to 32.5% for higher rate and 38.1% for additional rate taxpayers. This is markedly lower than the rates of income tax on other sources of income (20%, 40% and 45%) as it is intended to reflect the payment of corporation tax in the company. Whilst this may seem fair for listed companies that pay dividends out at arm’s-length, it seems less fair in the context of comparing dividend payments with payments of remuneration which are subject to national insurance contributions.
Two potential changes have been identified, either or both of which Rishi Sunak may wish to pursue – either national insurance might be added to dividends paid from close companies, or the rate of income tax on dividends might be increased to the full rate of income tax.
If the rate of income tax is increased then the deduction in the company for remuneration would be seen to compensate for the lack of national insurance payment on the dividend, so it would seem unfair to introduce both.
I think the likelihood of either of these changes is quite high and therefore I would strongly recommend that if dividends are being contemplated before sixth of April such payments should be made before budget date.