The coronavirus pandemic has cost the UK £210 billion so far this year, according to the National Audit Office. Rishi Sunak has suggested an estimated total spend of £280 billion.
The chancellor’s Spending Review has confirmed a pay-freeze for public sector workers and a prediction that the economic recovery could take until the end of 2022.
He’ll be keen to address the massive coronavirus debt and rebalance the books but recent measures, such as the extension of the furlough scheme, prove that the spending is not yet at an end.
So, what does Rishi Sunak have up his sleeve? And what can he conjure up to claw back massive spending and lost tax revenue?
Recommendations from the Capital Gains Tax review are in
Back in July, the chancellor announced that he was calling for a review into Capital Gains Tax (CGT). In 2018/19, around 276,000 taxpayers received a CGT tax bill, amounting to £9.5 billion. During the same period, Income Tax brought in £200 billion.
The Treasury-backed Office of Tax Simplification (OTS) made eleven recommendations intended to simplify the tax and to help fill the hole that the coronavirus pandemic has left in public finances.
The OTS recommends:
- Reducing the CGT Allowance
For the 2020/21 tax year, the CGT allowance is £12,300. This is the amount of profit you can make from an asset without paying CGT.
The OTS has recommended dropping the allowance significantly, to between £2,000 and £4,000. The lower allowance could raise an extra £14 billion and double the number of people paying the tax each year.
- Aligning CGT with Income Tax
Another OTS recommendation is to align CGT rates with Income Tax rates.
Basic-rate income taxpayers are currently taxed at 10% (instead of 20%) for gains on asset sales, and 18% for gains made on a second home or investment property sales.
For higher-rate taxpayers, CGT is 20% on asset sales and 28% on property sales.
Raising tax rates to align them with Income Tax – 20% for Basic-rate, 40% for higher-rate, and 45% for additional rate taxpayers – could help to claw back the government’s 2020 overspend.
- Other OTS recommendations
Among the 11 recommendations made by the OTS is the removal of the Inheritance Tax (IHT) ‘uplift’ rule.
This rule means that currently, any assets you inherit are valued when someone dies. A portfolio once worth £100,000 that rises to £200,000 on death is valued at £200,000. You only pay CGT on any future gains.
Under the new recommendation to scrap the so-called ‘uplift’, you’d pay CGT on the £100,000 gain as well as on any future gains.
Other recommendations include scrapping Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) and Investors’ Relief.
There are other options for Sunak to consider too
Sunak and Prime Minister Boris Johnson have ruled out a return to austerity. The chancellor has also committed to continued spending on coronavirus measures while the pandemic remains a threat. But tax changes are likely in the new year.
- Inheritance Tax
The FTAdviser reports that the government has been looking to make IHT reforms for the last ten years.
One key area under threat is the ‘seven-year rule’ for gifts. This exemption currently means that there is no IHT to pay on gifts if the person making the gifts survives for seven years or more from the date the gift is made.
The Chancellor might also increase the rate of IHT payable, reducing current thresholds or reforming reliefs. Replacing the seven-year rule with a Lifetime Gift Allowance has also been suggested.
- Income Tax
It was a Conservative manifesto pledge not to raise Income Tax but that was pre-pandemic. According to the Financial Times, ‘an increase in the basic rate of income tax to 21% would raise £4.7 billion’.
Increasing higher-rate Income Tax from 40% to 41% would raise an additional £1 billion.
- Other potential changes
The Guardian recently reported that Deutsche Bank has proposed a 5% tax for those opting to work from home once the immediate threat of coronavirus passes. They calculated that such a tax could raise £7 billion in the UK.
The Social Market Foundation (SMF) thinktank meanwhile suggests imposing a new ‘Property Capital Gains Tax’ on all UK house sales. The measure, according to the SMF, could raise £421 billion over the next 25 years.
Get in touch
What the chancellor has up his sleeve remains to be seen. But two taxes thought highly likely to be on his radar are Income Tax and Inheritance Tax (IHT).
While the immediate threat of the coronavirus pandemic remains, the government is committed to its measures designed to protect jobs, and spending is far from at an end.
When the pandemic begins to subside, Rishi Sunak will have a mammoth task as he looks to rebalance the books and some tax changes seem inevitable.
If you’d like to discuss the impact of potential future changes on your long-term plans get in touch. Please email email@example.com or call 01242 514563.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.