Now the bills for dealing with the Covid-19 pandemic have started to arrive, attention is turning to how these will be paid. Inevitably there is a tension between the public purse and how much remains in a taxpayer’s pocket. The Scottish and UK Government may be minded to recall Jean‑Baptiste Colbert’s quote from the late 1600s “the art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing”. As a country we have become used to relatively low rates of taxation, given the rates back in the 1960s and 1970s which at one point reached over 100%, but it appears now that current tax rates will be increased, at least for a period.
Income Tax and Capital Gains Tax are the two which will affect most individuals. Income Tax is further complicated by the Scottish rate of Income Tax applied to earned income under which Scots now have the highest rates of Income Tax in the United Kingdom. Is there much scope for further increase without causing a stampede across the border? Capital Gains Tax of all the taxes is almost a voluntary tax incurred by those who choose to pay it, and generally it is the tax that causes most issues within any tax planning exercise. Traditionally it has raised more for the Exchequer than Inheritance Tax, which was in the news 18 months ago following the publication two Office of Tax Simplification (OTS) Reports. Since then there has been singular silence from the UK Government possibly because its amendment will be extremely complicated and require considerable amount of thought around its interaction with other taxes, particularly Capital Gains Tax. The OTS has now been asked to review CGT and its report is expected before the end of the year – just in time for the delayed budget! Topics under consideration are –
- rebasing of base costs – potentially similar to what happened in April 1988, allowing rebasing of asset values to March 1982 (only 17 years after the introduction of CGT as opposes to the 38 years which have now passed since 1982),
- no automatic uplift to date of death values which means that a deceased’s assets potentially pass at historic base costs, and raises questions of double taxation (IHT on death and CGT on a subsequent sale) unless allowance is given for any IHT paid. Another rebasing may help that and address problems around valuing assets which have been held for a long time,
- automatic hold over on making a gift. At the moment CGT is often the tax which causes most concern when making gifts.
- A review of CGT reliefs to make sure they are fit for purpose.
- A reduction in the CGT annual allowance, currently £12,300, but that may lead to considerably more taxpayers falling into the CGT net and having to lodge annual tax returns
Less than a month ago I thought the chances of Inheritance Tax being substantially amended at this stage were remote (famous last words) but with the delay in the budget and the OTS CGT report being imminent the chances of significant changes to both CGT and IHT are increasing significantly as the two taxes are so intertwined.There may be a considerable amount of thought given to amending the various allowances relating to pensions under Income Tax, but also the sale of businesses and reinvestment of the sale proceeds of business assets for Capital Gains Tax. The amendment of allowances is always complicated and inevitably leads to unintended consequences so as usual in the next budget, whenever that might be, careful attention will have to be paid to the small print.
In the meantime, if it does not prejudice your own financial position, perhaps thought should be given to maximising the use of various allowances or taking advantage of the relatively low tax rates in moving assets between the generations, just in case they are changed.
If you have any questions regarding this article or wish to discuss you own tax planning, we can help.