It seems that a burgeoning deficit is one of the more guaranteed results of the UK government's extensive support packages to prop up our economy in response to the coronavirus pandemic. The media is now replete with speculation about how Government may seek to address this, including through tax policy changes.
In this article we briefly summarise some of the recent crystal-ball gazing on how tax policy may develop, together with highlighting some initial suggestions about how clients might seek to prepare.
It is important to note from the off, however, that it is not inevitable that tax rises follow the very significant increases to government borrowing. There is a reasonable school of economic thought that governments may instead look to hold interest rates low, to stimulate economic growth and to encourage controlled inflation in order to gradually erode the debt: sometimes enticingly dubbed "global healing". Much may depend on the length of the crisis.
Please don’t hesitate to get in touch with your usual contact at Womble Bond Dickinson or any other member of our team if you would like to discuss how any of the possible changes may affect you.
Leaked Treasury paper
A Treasury briefing for the Chancellor mysteriously found its way to the Daily Telegraph last week, which reported that all of the following are under discussion:
- Increases to the rates of income tax
- An increase to the VAT rate
- Increases to national insurance contributions
- Increases to corporation tax.
Taxes on income dominate the tax take – generally accounting for over 50% of the overall revenue raised each year, so it is no surprise that movement on headline income rates is being considered.
Adding a penny to income tax – by increasing the 20% rate to 21% is said to potentially raise £4.7bn each year. The Financial Times this weekend reported that the likely current year budget deficit as a result of the current crisis will be in the region of £337bn (estimates range from £300bn to £500bn), so this is a drop in the ocean. (For context, the OBR estimated the 2019/20 tax take would be £811.4bn.)
Adding 1p in the £ to the 40% rate has been said to bring in another £1bn p.a., while increasing the 45% rate to 46% would only net around £105m, so more popular measures aimed just at high earners may not yield anywhere near enough.
Whilst it doesn’t seem to have been mentioned in the leaked document, the capital gains tax (CGT) rate is historically low, so it would seem foolhardy to assume that an upwards adjustment would not be at least considered along with other tax hikes. Income tax relief on pension contributions for higher rate taxpayers has frequently been mentioned by policymakers and commentators, too (scrapping these is thought to raise around £10bn). Although a Conservative administration might find it uncomfortable to look at either of these, clearly there can be no guarantees in the current environment.
Other predictions made by tax practitioners in recent days have included:
- Adjusting the income tax personal allowance down – although this seems politically toxic as it would raise effective rates most for the lowest paid
- Dropping the level at which the personal allowance starts to taper for higher earners – although this risks alienating core Conservative voters
- Increasing national insurance contributions (NICs), e.g. by scrapping the differential between the self-employed and the employed, and/or scrapping the NICs upper earnings limit for employees (a 2% rate applies over £50k p.a.). Remember that when Rishi Sunak announced the immediate aid package for self-employed workers, he intimated that increases to national insurance contributions for the self-employed might be the quid pro quo. The IFS have picked up this theme in a recent paper. These equalisation measures may perhaps be combined with a NICs giveaway for lower earners by aligning the starting threshold with the income tax personal allowance
- Re-aligning the CGT rate with income tax (as above), or increasing it to a flat 28%
- Given the Office for Tax Simplification's and All-Party Parliamentary Group's suggestions for reform of inheritance tax (IHT), it is possible that business property relief (BPR) and Agricultural Property Relief (APR) could be in the cross-hairs. Our guess is that this is less likely as an immediate measure, because such fundamental surgery to the system of IHT reliefs would be complex, including in terms of economic and political impact, and the yield would be mostly deferred. (IHT may escape significant early measures altogether as it only yields £5.4bn p.a., although who knows if Government may in time get tempted by the All-Party Parliamentary Group's proposals for fundamental reform)
- Some have mentioned a potential reduction (e.g. capping at £225k per sale) to main residence relief from CGT, but again this would be politically toxic
- Others see scope for reducing SDLT to re-invigorate parts of the property market – e.g. reduction for transactions under £750k, but increases over that level
- Finally, Government may consider reform of council tax bands to a more clearly progressive arrangement.
Wealth tax and windfall corporate taxes?
A recent YouGov/NEON poll showed a majority of the UK public supports “windfall taxes”, e.g. on companies who have thrived during the pandemic such as food retailers. 53% of people are said to have supported the idea of an excess profits tax on these industries, with a relatively few (percentages in the teens) ambivalent or opposing.
The same poll showed that 61% of the 1,682 people polled would also approve of a wealth tax (the poll simply said the rate would be "a percentage") for those with assets over £750,000, excluding their pensions and main home. Again, only low numbers were ambivalent (11%) or opposed (14%). A senior lecturer at Manchester Metropolitan University has calculated a one-off 2% levy on UK households' net wealth would raise £300bn.
Needless to say the difficulty with these measures is capital flight, brain drain and resultant economic damage, so they are tricky measures for governments to introduce without full, or significant, international co-operation.
Others have mused on possible measures designed to incentivise those holding cash to spend more – so headline interest rate reductions or taxes on cash holdings (however difficult the latter might be to implement) could be interesting ideas.
It seems the leaked Treasury paper suggested that other deficit management measures could include:
- Ending the triple lock on state pension increases (it is suggested that this might save £8bn p.a)
- A two year freeze on public sector pay (savings reported of £6.5bn in 2023/4).
Again, neither of these can be considered politically straightforward even in the current environment when it seems voters generally accept that something will have to be done to balance the books. Quite apart from ethical considerations, freezing pay for doctors, nurses, care-workers and others on the front line of the pandemic response could carry a very heavy political price-tag.
How might clients respond?
Clearly clients will wish to talk about these measures and what they might do to prepare. Here are our initial thoughts:
- Clients may wish to sell investments or other assets which stand at significant gains, in order to bank the historically relatively low capital gains tax rates. (If you can afford it, you might wish to hold on to unrealised losses.) Care will be needed here to navigate the "bed-and-breakfasting" capital gains tax rules which may identify sales of securities with re-purchases of them within a thirty day period
- Equally some may wish to make gifts to push assets down a generation, to trigger gains and to accelerate their estate planning
- Should corporation tax adjustments turn out to be significant, some will have in mind exit strategies from structures such as family investment companies – e.g. can loans used to fund the company be repaid for a partial exit, or should a liquidation prior to a CGT rate hike be on the list? (As far as adjustments to existing family investment company structures are concerned, in general we think caution is appropriate – corporation tax rates are relatively low, and the treatment for dividends received by these structures is generous. Provided there is a good existing exit route, they are likely to remain fairly attractive unless corporation tax rates are very aggressively hiked)
- Clients may seek to accelerate sources of income, e.g. taking dividends or increasing salaries from owner-managed businesses, and/or taking distributions from trusts. (Going forward NIC changes may further bias remuneration for business owners to dividends and away from salaries)
- Many families will look at banking IHT reliefs, e.g. by settling assets which qualify for BPR or APR
- Families with international holding structures may wish to request distributions from non-UK trusts, especially if they would be matched to gains, not income
- Given a VAT hike, all will have a keen eye going forward for when non-UK structures can reasonably be invoiced for professional services
- There may also be an argument for transferring assets to new trusts in anticipation of a wealth tax being introduced, although much would of course depend on its form. (Generally this should only be contemplated where there would be easy and tax-neutral route into the structure and to reverse back out, so this is likely to be most relevant for cash-rich clients who are non-UK domiciled and not yet deemed domiciled, or clients holding BPR/APR qualifying assets)
- Longer term adjustments to the national insurance system for the self-employed may also have ongoing economic impact for how businesses structure themselves, for instance an increase in prevalence of salaried partners (having fallen out of favour in more recent times)
- Some who are using LLP structures may be tempted back to limited companies
- A number of the self-employed may wish to re-enter the world of the straightforwardly employed, with greater workers' rights and protections.
There is much food for thought here, so don’t hesitate to call your usual contact at Womble Bond Dickinson or any other member of our team to discuss any of the issues raised.