Spring Budget and personal tax: what’s in the box?

The Chancellor is due to deliver his next Budget on 3 March 2021, postponed from the Autumn. Below, we discuss what the Chancellor may target in his second Budget, as he starts work on rebuilding the economy after a tumultuous first year in office.

Capital gains tax (CGT): an easy target?

The latest Conservative manifesto committed to no increase in the rates of income tax (IT), VAT, and national insurance contributions (NICs). Given that circumstances have completely changed since that promise was given in November 2019, no one can rule out a retraction. It does however leave CGT as a possible target for change, particularly following the November report from the Office of Tax Simplification (OTS), which recommended changes such as aligning CGT rates with income tax, and reducing allowances.

Increases to the CGT rate could, however, risk discouraging potential entrepreneurs, stunting growth and job creation. Given the need for economic recovery, the Chancellor may protect reliefs that encourage investment and entrepreneurship. An alternative could be CGT rate increases only on disposals of more passive types of investment, such as on rental property, as well as more technical changes to CGT reliefs.

Subject to investment decisions, you may want to think about accelerating planned disposals or gifts whilst the CGT rates are known and remain low. Any action taken in anticipation of changes does though involve significant risk. For example, CGT rates may not change as you expected or action taken before the next Budget could be caught by a subsequent change. No one thinks rates will fall.

Pension contributions: is higher-rate relief at risk?

A concern before every Budget is the availability of income tax relief on contributions to registered person schemes.

Currently, income tax relief on contributions is given at the taxpayer’s marginal rate, which for some is 40% or 45%. If the Chancellor chose to restrict this to the basic rate of 20%, or limit contribution allowances further, this could significantly affect retirement planning for many taxpayers.

Previous changes to tax relief on pensions include the tapered annual allowance, whereby high earners had a reduced yearly contribution limit, and the introduction of the lifetime allowance, with charges for taxpayers who exceeded the total contribution threshold. Both allowances are potential targets for ‘tinkering around the edge’ of pension tax relief, and could be less unpopular than removal of higher rate relief on the contribution itself.

Now is a good time to talk to your adviser about your pension position, and whether or not it is appropriate in your circumstances to make a pension contribution in advance of the Budget.

A potential increase in inheritance Tax (IHT)?

In the last two years, reports suggesting the reform of IHT have been published by the Office of Tax Simplification as well as an All-Party Parliamentary Group. Particular areas focused on include the rules on lifetime gifts, the exemptions, and the CGT-free uplift on death.

Given the impact of large scale IHT reform, we hope that any major changes are first subject to consultation, but that is never guaranteed.

Self-employed: more support to be announced

The Chancellor has confirmed that details of the fourth grant under the self-employment income support scheme (SEISS) will form part of the Budget. This was designed as an equivalent to furlough for the self-employed, but it has been criticised for excluding some groups, such as the newly self-employed.

The other consideration for the self-employed is the Chancellor’s comment when he first introduced the SEISS: that given this support, on a similar basis to those in employment, it was harder to justify the inconsistent contributions between people of different employment status. Early major changes are not out of the question.

The Stamp Duty Land Tax (SDLT) holiday

The SDLT holiday for properties up to £500,000 is due to end on 31 March, so property disposals completing after this date may be liable for significantly more SDLT. The Government has not indicated that this will be changed, but some MPs have called for the end of the holiday to be gradual rather than ending so abruptly.

Wealth Tax – unlikely?

An independent body published a detailed report in December, covering ideas for the principles, design, and delivery of a potential UK wealth tax. It recommended a one-off tax, payable over five years, but, as an independent report, it carries little official weight.

Given the Chancellor’s stated personal opposition to a wealth tax, as well as the immense complexities of implementation, we think this is currently unlikely.

Conclusion

The chief question as we approach the Budget is whether or not the time is right for tax increases. This Budget was postponed from the Autumn to allow the Government to concentrate on the more urgent measures needed to support individuals and business, rather than outlining long-term plans.

With the COVID vaccination campaign going well, but with no clear end to lockdown in sight, the Chancellor may well feel that the next Budget, due this Autumn, is a better time for more significant announcements. Given the need to balance restarting the economy with coping with a huge deficit, however, nothing can be ruled out.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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