Rishi Sunak’s latest budget for the UK is set to be announced with the furlough scheme rumoured to be extended and taxes to rise for certain parts of the country. Is a wealth tax set to be brought in? What is the private banking industry predicting and expecting from the 2021 budget?
The 2021 Spring Budget is set to spring surprises for the private banking sector, what what exactly?
Andrew Dixon, head of UK & international wealth planning, Kleinwort Hambros
This Budget will see Chancellor Rishi Sunak attempt to balance the demands of the Government’s Covid-19 response with the need to ensure the UK public finances’ sustainability. With political focus inevitably on the very short term, the Chancellor’s challenge will be to reconcile demands for continued support with manifesto promises.
The Treasury had at one point been expected to use this Budget to start increasing taxes, and whilst we do expect to see a higher taxed environment for both corporates and individuals, we expect change to be incremental. Certainly, there is a risk of ending a financial recovery before it even begins if any government is too aggressive on taxation policy, or risks falling out of favour if they raise taxes too close to a general election.
Capital Gains Tax
The greatest concern amongst clients is the mooted increase in the 20% rate of capital gains tax (CGT), to bring it in line with the current rates of income tax of 45%, as a means of levelling the playing field. Many clients are considering if they should crystallise their capital gains tax now at current rates in anticipation the Government could raise them, and indeed, in some instances, uncertainty has prompted clients to bring succession plans forward in order to lock in current CGT rates as they are.
However, while we are not tax advisers, our guidance remains nuanced in these circumstances. Whilst we don’t anticipate any major hike to CGT, and any increase might not necessarily see it levelled to the full 45%, making the decision to crystallise assets ahead of Budget day, or not, is all down to helping a clients’ piece of mind. Our view is always to keep long-term goals in sight.
There has long been speculation that the government could introduce some form of wealth tax, to alleviate economic inequality by focusing on those with the most wealth. Covid-19 has exacerbated the perception and reality of economic inequality in the UK and there has again been some focus in the leadup to this year’s Budget on how those with the most wealth are taxed.
Whilst the idea of introducing a wealth tax has long been discussed, it’s not since the Wealth Tax Commission concluded in December 2020 that the UK could stand to benefit from introducing a one-off wealth tax (made applicable to those with a personal wealth of £500,000 made payable over 5 years), that the professional community began to take note.
During a Jeremy Corbyn led opposition, clients were particularly concerned by the prospect of a wealth tax, as well as exchange controls and income tax rising to 1970s levels, and many of our conversations with clients were dominated by this one topic. We’ve been having more of these conversations since the Commission’s latest report.
However, we have seen many countries struggle to implement a similar wealth tax, with it not raising the revenue expected. For example, France sought to implement a wealth tax but ended up raising property taxes instead as a more effective means of raising revenue. Moreover, Norway and Switzerland both have wealth taxes but no inheritance tax so one could argue the former is replacing the latter.
The Wealth Tax Commission did put forward a strong argument and a robust design to manage potential avoidance. However, clients are naturally sceptical about the notion of a one-off tax charge. Take Spain, when it reintroduced a wealth tax in 2012 it was supposed to be for a very limited time only, but it continues to this day. Moreover, it feels like such a fundamental change in tax policy should require some agreement from the public.”
But until all is revealed on March 3rd, what does it mean for looking after your affairs and planning in the run up to the tax year-end?
Whilst it is understandable to defer making any radical decisions until after seeing what the Budget has in store, there is also a risk of inertia. Arguably, financial planning that utilises annual tax allowances is a sensible approach regardless of the outcome of the Budget.
Whilst we always remind clients to make the most of their capital gains allowances before the tax year end, it makes sense to take these allowances sooner rather than later and we have seen more clients wanting to crystallise their CGT allowances pre-Budget.
Within the same vein of focusing on those with greater wealth, there has been ongoing discussion that there may be amendments made to the pension tax relief for higher earners. Despite there being little changes in recent years to pensions, there is always speculation in respect to pension reforms prior to the Budget.
It seems like this year Chancellor Rishi Sunak will opt to leave pension tax relief alone favouring restrictions on the increase of the Lifetime Allowance. However, it will not be long before speculation returns and the notion of a flat rate of tax relief on pension contributions returns.
Whilst we do not expect to see any meaningful changes made, continued speculation means there is potentially an added incentive in taking advantage of these allowances whilst they are available.
Indeed, it seems that currently the pension tax relief for higher earners is in particular not being taken advantage of. So, whilst the removal of such a benefit may be unwelcome, perhaps those who currently have this advantage and have not made use of it should make sure they benefit from it whilst they are still able to.
Rebecca Williams, head of wealth planning, Brown Shipley
Now is not the right time for significant tax changes. The priority should be the roadmap for business support and protecting the existing tax base. That said, there are several areas we would encourage individuals to be prepared for.
Corporation tax is an area where we might see some movement. As the fourth largest revenue generator, the yield from corporation tax has been lower than expected due to lower economic activity. The UK’s rate is also low compared to the EU for example. Just a 1% increase could add another £3 billion to government coffers.
National UK Wealth tax
A one-off wealth tax has been suggested by the Wealth Tax Commission as a potential way to address the issue of the sheer volume of pandemic related public debt, and we are seeing some nervousness among clients on the prospects of a wealth tax being introduced. At an individual threshold of £500,000 this would affect 8 million people , the majority of whom are likely to have wealth in their pension or main home.
A tax at this level is unlikely. The challenge for the Treasury is whether tax set at a higher threshold of wealth is worth the complexity, with potential issues around practicalities, implementation and administration of a wealth tax. In our view, it would be better to incrementally increase existing taxes rather than introduce a new tax that would overcomplicate the system. If we were to see anything from the upcoming Budget, it may be a move to a more formal consultation.
Capital Gains Tax
The first part of the OTS Capital Gains Tax (CGT) review from last November suggested that CGT rates could be brought in line with income tax rates, as these currently sit lower at 10% and 20%. There have been suggestions that the Chancellor could announce an increase in CGT but defer the start for the increase, encouraging people to realise their gains in the short term. Other potential areas for change are for the annual exemption to be reduced or removed, or for CGT to be applied on death.
We think capital gains has potential to be in the mix in Wednesday’s Budget. Individuals and families should be thinking about how changes to CGT might impact them. We’d encourage anyone with investments holding significant profits to talk their financial adviser about how the proposed changes could affect you.
Pensions Tax Relief
Pensions tax relief is always on the agenda. Although unlikely, we could see an introduction of a flat rate pension tax relief, reducing the amount that an individual can contribute to their pensions each year, as well as a possible further reduction in the lifetime allowance.
Additional possible tax measures
We don’t expect to see increase in rates of income tax, national insurance or VAT, given the government’s 2019 pledge to maintain these. There could, however, be changes to allowances or thresholds to increase yield without changing the rates of the tax itself.
With the end of the tax year approaching on 5th April, there are a number of areas individuals and businesses can consider, ensuring they are making the most of their allowances.
Areas to consider include:
- Annual ISA allowance for individuals is £20,000 and if you don’t use it you will lose it.
- Tax breaks are provided on pension contributions.
- For married couples you can make the most of being able to share various allowances between you.
- If risk appetite allows, income tax can be reduced by investing through venture capital trusts or the Enterprise Investment Scheme.
- The annual inheritance tax (IHT) exemption is £3,000. Those with surplus income may wish to pass on gifts without incurring IHT.
- Charitable giving. Charities have suffered throughout the COVID-19 pandemic, but by giving to charities you can benefit both them and gain tax benefits by doing so.
Dean Turner, economist, UBS Global Wealth Management
With regards to measures to support the economy until restrictions are eased, we expect the Chancellor to extend the furlough scheme until at least June, in a bid to tame unemployment. Following the Chancellor’s announcement of a £5bn company grant scheme, we may also see more generous lending terms to companies announced, as well as an extension to tax exemptions in order to help firms through what will hopefully be the last phase of lockdowns and, crucially, the recovery thereafter. The housing stamp duty cut could also be extended, although the current strength in the housing market raises questions as to whether this is needed.
Following a better than feared performance by the UK economy in the final quarter of 2020, the public finances are likely to be in better health than last reported by the OBR. We suspect there will be less need for the Chancellor to increase taxes rapidly to balance the books than previously thought; with this in mind, we don’t expect an immediate tax hike in the Budget. However, future changes to corporation tax are likely to be signalled, as well as some other modest tweaks (e.g. pensions and freezing of income tax thresholds).
The interesting thing to watch out for will be any surprise spending announcements from Rishi Sunak. These could take the form of multiple infrastructure projects to boost the Government’s levelling up agenda, which arguably is what Boris Johnson was elected to do. Announcements to push further the greening of the UK economy ahead of this year’s COP26 meeting could also feature.
Notwithstanding any significant spending announcements in the Chancellor’s Budget, these are unlikely to have a material impact on the economy in the short term. The easing of restrictions in the coming months should lead to a vigorous rebound in GDP from 2Q onwards.
Given the improving outlook for the UK, we expect that sterling will continue to strengthen against the dollar to above the 1.45 level by the end of the year.
Tim Snaith, partner, Winckworth Sherwood
In a number of ways, the budget did not have the sharp teeth so many feared. There was no mention of a wealth tax, no wholesale reform to the inheritance tax regime, no sign of the increases in Capital Gains tax that were thought inevitable and an extension to the SDLT holiday. That is not to say that the door has now closed on these changes; in fact, we think it remains wide open and that the Chancellor will turn his attention to some of them in due course.
It is also interesting to see the Government’s forecast for inheritance tax receipts for the coming year has, for the first time, reached £6bn. With this news and the OTS’ most recent report on the subject in hand, it remains an area we believe that is due for significant reform in the coming couple of years.