Partner Caroline Casagranda, in our leading Wills, Probate, Tax & Trusts team, reflects on the spring budget.
According to the Office for National Statistics (ONS): “Public sector net debt, excluding public sector banks, rose by £276.3 billion in the first seven months of the financial year to reach £2,076.8 billion at the end of October 2020, or around 100.8% of gross domestic product (GDP).”
Figures published by the Office for Budget Responsibility (OBR) have suggested that borrowing could increase to £372.2 billion in the financial year ending 2021, slightly higher than the Institute for Fiscal Studies’ (IFS) forecast of £350 billion.
Despite the OBR and the Bank of England’s forecasts of a stronger and quicker economic recovery than had earlier been expected, the Chancellor had said that he needed to “level with people” about the country’s “unsustainable” level of borrowing.
This had led to some speculation that the Chancellor might announce measures aimed at raising revenue, including Capital Gains Tax (CGT) increases, a reversal of the “triple lock” on Income Tax, National Insurance and VAT or the introduction of a new “wealth tax” for those with assets over £500,000 in his spring budget.
In what may come as something of a relief to many individuals and families, far more limited changes were announced on 3 March, with a future rise of 6% in Corporation Tax (to 25% by 2023 for companies with profits of over £50,000) instead dominating the tax headlines.
Mr Sunak had previously rejected a proposal from the Wealth Tax Commission in December 2020 to introduce a new “wealth tax” for those with assets over £500,000, describing such a move as "un-Conservative".
Capital Gains Tax
In summer last year, the Chancellor formally requested that the Office of Tax Simplification (OTS) review the current CGT regime.
Despite speculation that the Chancellor would decide to raise the 20% rate to bring it more in line with Income Tax, no increases were announced in the spring budget. Analysts had forecast that an increase could raise upwards of £14 billion annually.
However, Capital Gains Tax allowances were instead frozen at their current level until April 2026, which will benefit many in the shorter term but may mean over time that more people are impacted by CGT in real terms, if the value of any additional properties (to a main home) and other taxable assets increases.
CGT rates currently stand at a historic low, with the basic rate at 10% (18% for residential property) and the higher rate at 20% (28% for residential property). The gap in comparison to the higher (40% on earnings between £50,001 - £150,000) and additional (45% on earnings over £150,000) rates of Income Tax is obvious.
Inheritance Tax
According to the OBR, Inheritance Tax (IHT) currently raises £5.3 billion annually, so the impact of any changes to IHT would, at best, have a modest impact when it comes to tacking the UK’s debt pile.
IHT is applied at a rate of 40% to the portion of a person's estate valued at over £325,000 (other allowances and exemptions may apply). IHT may also be payable on any gifts made by the deceased to individuals or trusts in the seven years prior to their death.
In the Office of Tax Simplification’s (OTS) report, “Overview of the Tax [IHT] and Dealing with Administration”, published in November 2018, recommendations included shortening the seven year qualifying period for gifts to five years (whilst removing the tapered relief currently available), replacing the existing CGT uplift on death with a “no gain, no loss” approach and IHT relief or exemptions and simplifying the current tax thresholds and exemptions relating to lifetime gifting.
Proposals in a second report, “Simplifying the Design of Inheritance Tax”, published in July 2019, included introducing a lower flat rate of IHT, but significantly reducing the available reliefs and exemptions. The report also recommended removing the CGT uplift on death.
In the spring budget, the Chancellor announced that Inheritance Tax thresholds, which had been due to raise in line with CPI from next tax year, will instead remain at their current rates until 2026. As the value of estates (and in particular, property) rises, more beneficiaries may find themselves impacted by IHT in the future.
Income Tax and National Insurance Contributions
In its 2019 manifesto, the Government announced a “triple lock” to freeze Income Tax, National Insurance (NI) and VAT rates until 2024.
However, given that Income Tax is the single biggest source of tax revenue for the Government, there had been growing speculation that that promise may be undone.
HMRC has previously highlighted that a basic rate Income Tax rise of just 1% could raise nearly £5 billion, almost equivalent (as above) to the total amount raised by IHT annually.
Mr Sunak had also increasingly pointed to the support provided to self-employed workers during the past year, through the likes of the Self-Employment Income Support Scheme, when implying that the Government may seek to align the National Insurance contributions (NICs) made by those who are self-employed (9%) with those of employees (12%, with an uplift for those earning more than £50,000). NICs represent the second biggest source of taxation income for the Government.
In the spring budget, the Chancellor announced that the Income Tax personal allowance and the higher rate threshold will rise next year as planned but will then remain at that level until April 2026. The former will increase to £12,570 and the latter to £50,270. Again, if salaries rise while the thresholds remain static, in real terms people may find that their disposable income (after tax) is reduced in real terms.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
