Before the scheduled Autumn budget, advisors and taxpayers alike were bracing themselves for a hike in the rate of Capital Gains Tax (“CGT”) as well as the very real possibility that some reliefs might be withdrawn altogether. For example Business Asset Disposal Relief (“BADR”), known previously as Entrepreneurs’ Relief. When the budget was pushed back to Spring there was an audible sigh of relief but with a number of recent budgets containing surprise announcements, it is important to consider any possible changes ahead of budget day on 3rd March.
Against the backdrop of COVID-19, there is a very real risk that there will be an increase in tax rates to fund the economic support provided by the Treasury during the pandemic. However, more uncertainty is not what the economy needs at the moment. We, had hoped any sweeping changes will be consulted on to allow taxpayers the opportunity to plan if required, but as budget day edges closer with no hint of what is to come, taking action to utilise reliefs and rates as they are now may well be beneficial.
What are the possible changes?
Capital Gains Tax
CGT rates are historically low at the moment, ranging from 10% for basic rate taxpayers up to 28% for higher rate taxpayers on the sale of residential property. There are also some fairly generous reliefs available, including BADR, which can reduce the rate of tax from 20% to 10% on up to £1 million of gains.
The Office of Tax Simplification (“OTS”) recently set out recommended changes to CGT. As well as an increase to the rates (to align with Income Tax rates), the OTS has proposed the following:
- Withdrawing Business Asset Disposal Relief and replacing it with a relief focused on retirement
- Abolishing Investors’ Relief
- Removing the uplift in value of assets on death with the recipient instead acquiring the asset at the original base cost of the deceased
- Reducing the annual exempt amount (currently £12,300) and replacing with a relief for inflationary gains
- Taxing retained earnings in companies at dividend rates rather than CGT on the sale of the shares or when the company is liquidated
Income Tax and National Insurance Contributions (“NIC”)
Income Tax rates are not expected to increase and the Scottish Government have confirmed that Scottish rates will remain the same. However, pension reliefs, which have already been heavily restricted in the past few years could be reduced further, in particular for higher earners.
However, self-employed individuals may need to brace themselves for an increase to NIC. The Chancellor has already hinted that the self employed should pay the same level of contributions as those who are employed. Currently the main rate of NIC for the self employed is 9% compared with 12% for employees.
With the rate at an all time low of 19%, it is estimated for each percentage point increase in the rate, around £3.4bn would be raised. With average rates across the G20 being 27%, the rate could increase and still leave the UK in a highly competitive position.
Stamp Duty Land Tax (“SDLT”)
The Scottish Government has already confirmed that the equivalent Land and Buildings Transaction Tax (“LBTT”) holiday will end on 31 March. Speculation predicts that the SDLT holiday may have the same fate.
The Wealth Tax Commission published their report in December and although not entirely in favour of the introduction of such a tax, acknowledged that it could raise as much as £260billion. This could be achieved by levying a charge of 1% for five years on those individuals with wealth exceeding £500,000. Given this would be a first in the UK, and the Chancellor has previously publicly dismissed the introduction of such a tax, this option might be less likely to feature in the budget day announcements.
If you have any further questions, please contact Jill Walker or your usual AAB contact.
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