The upcoming budget: what to expect

Ola Adeosun, Partner and Wealth Planner

Chancellor Rishi Sunak commissioned the Office of Tax Simplification (OTS) to carry out a review of capital gains tax (CGT) last July. This brought to attention the trade-offs needed to plug the estimated £271 billion¹ deficit caused by the COVID-19 pandemic to the treasury's coffers. For the OTS, it represented a mandate to carry out its first detailed analysis focused specifically on CGT.

CGT review – the focus 

In November last year, the OTS issued the first of two planned reports, looking into the policy and design of the existing CGT regime and, outlining four specific areas for reform:

• Rates and boundaries: it felt that the disparity between the rates of CGT and income tax distorted behaviour, and a closer alignment of the two taxes could address this issue.
• Annual exemption: it highlighted that 1 in 5 individuals that crystallise a gain do so within the annual exempt allowance, currently £12,300 in the 2020/21 tax year. If the intention was for the exemption to be a de minimis level, then it was too high.
• Interaction with inheritance tax (IHT): the OTS proposed the removal of rebasing of business assets for CGT purposes on death, where those assets already qualified for business relief, hereby exempt from IHT. This aligned with previous proposals in the OTS review of IHT^2, and the IHT focused report issued by the All-Party Parliamentary Group (APPG) in January 2020³.
• Business reliefs: the OTS proposed that business asset disposal relief (BADR), previously known as entrepreneurs' relief, could be linked to providing a benefit to those who saw their business as a form of pension and were looking to retire at the point of disposing of the business asset. In the last budget in March 2020, the Chancellor had already reduced the BADR lifetime limit from £10 million to £1 million at which a 10% rate of CGT was payable.

 CGT review – the backdrop

The OTS proposals are far reaching and go beyond simply increasing current rates of CGT. However, this approach is necessary for CGT to have a substantial impact on Government tax revenue. Similar to IHT, CGT raises a relatively small amount of tax with only 265,000 individuals a year contributing, and over 70% of those not having incurred a CGT liability in the previous 10 years⁴. It represents 1% of the UK Government's tax revenue of £800 billion. In comparison, income tax, national insurance contributions (NIC) and value added tax make up three quarters of the tax intake every year. Any increase in the rates of these three taxes however, would necessitate breaking an election manifesto promise.

Another interesting development was the wealth commission report issued in December 2020; assessing the merits of introducing a wealth tax whilst stopping short of making any recommendations. The commission's modelling indicated that a 1% rate per year for a period of five years for those with a net wealth in excess of £500,000 would raise a whopping £260 billion. An astonishing sum that would go a long way to addressing the fiscal deficit. Whilst such a 'solidarity tax' in the wake of the pandemic cannot be entirely ruled out, its introduction may prove unpopular and, it could potentially be too complex to implement. The OTS recommendations to reform CGT and IHT are the more likely strategies the Government would implement to increase revenue from capital taxes.

An increase to the corporation tax rate of 19% has also been mooted. However, this would present another challenge to small businesses battered by the pandemic, whilst also sending out the wrong message that post-Brexit Britain is open for business.

Predicted budget changes

• The furlough scheme is due to end in April 2021, so we may yet see additional financial help for businesses and individuals adversely impacted by nationwide lockdowns.
• The general consensus is that this is not the budget for significant increases to tax rates.
• Tax relief on pension contributions costs the Government £36 billion a year, so this is likely to be considered.
• The discrepancy between the rates of NIC payable by the self-employed relative to the employed may be addressed, in light of the Chancellor's remark; ‘If we all want to benefit equally from state support, we must pay in equally’.
• The potential for an NIC charge to be introduced on dividend income received by contractors with personal service companies.
• Stealth taxes can also have an impact, the removal of previously planned increases to the £12,500 personal income tax allowance and, the £37,500 basic rate income tax threshold could cost the Government little political capital whilst bringing in much needed savings.

Overall, a good outcome from the upcoming budget would be the Government providing greater clarity on the future trade-offs needed to repair the nation's finances, hereby allowing individuals and businesses alike to plan for the changes ahead.  

1. COVID-19 Cost tracker as at December 2020, National Audit Office; https://www.nao.org.uk/covid-19/cost-tracker/
2. https://www.gov.uk/government/publications/ots-inheritance-tax-review-simplifying-the-design-of-the-tax
3. https://www.step.org/system/files/media/files/2020-05/STEPReform_of_inheritance_tax_report_012020.pdf
4. https://www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-by-design 

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