Many wealthy individuals have fast tracked their tax and estate planning during the pandemic; partly due to an increased focus on their mortality, but also due to the inevitable question of how the UK government is going to balance its books, after its record breaking spending (over £280 billion to date) to provide support to those affected by coronavirus.
Some feel that it is inevitable that higher taxes are required to (in Rishi Sunak’s words) “return the public finances to a more sustainable footing”. However, the UK is far from out of the woods with coronavirus, with many arguing that even more public spending is desperately needed. Indeed, some commentators, and even advisors, feel it would be the worst time possible to introduce tax increases when so many individuals are struggling.
Whilst across the board measures may seem unpalatable at this time, we look at some of the more targeted tax changes that have been discussed over the past 12 months.
Capital Gains Tax
Most capital gains tax collected comes from (in HMRC’s words) “the small number of taxpayers who make the largest gains.” In 2018/19, 40% of CGT came from those who made gains of £5million or more. This group represents less than 1% of capital gains taxpayers each year. Many clients have wanted to trigger disposals prior to 3 March 2021 to crystallise the current relatively low CGT rate. Similarly, many offshore trustees have considered making larger distributions (where these are matched to trust gains) to UK resident beneficiaries concerned about a tax increase. We have also seen a desire to establish trust structures ahead of the next budget, with a view of triggering CGT and rebasing assets to current market value when they are settled on trust.
The All-Party Parliamentary Group for Inheritance and Intergenerational Fairness last year made (amongst others) the following recommendations:
- abolish agricultural and business property reliefs from Inheritance Tax;
- abolish Potentially Exempt Gifts and instead make Inheritance Tax payable on all lifetime gifts made above a certain threshold amount; and
- abolish the CGT tax free death uplift.
The conclusions of the All-Party Parliamentary Group led many wealthy individuals to hasten making gifts during their lifetime. Whilst the current nil-rate band (the amount subject to Inheritance Tax at 0%) has not increased since 2009, the current rules do not place a limit on the amount a person can gift away during their lifetime. This means that it is possible for significant wealth to be passed from one generation to another, with no Inheritance Tax due. By abolishing these rules, the proposals seek to catch more gifts, but suggest the tax rate should be lower.
The UK currently has the fourth lowest corporation tax rate in the OECD, and there has been considerable speculation about an increase of up to 24%. It is hard, however, to reconcile such a move with the UK government’s aim to increase international investment in light of Brexit and the pandemic.
Family investment companies have been a popular planning technique for wealthy families, and any potential corporation tax rate increase would decrease the efficiency of such structures in the short term. However, the ability to build value in the hands of the next generation whilst keeping control of the entity still makes these companies an attractive option.
One-off wealth tax
A group of academics and tax professionals, called the “Wealth Tax Commission” were assigned the task of analysing proposals for a UK wealth tax. Most jurisdictions have moved away from an annual wealth tax, having found that it did not significantly increase the tax take and was administratively burdensome. Perhaps in light of this, the Commission recommended a one-off, rather than annual, wealth tax.
Key recommendations by the Commission about this wealth tax are that:
- It should apply to the individual’s worldwide, and not just UK assets. Their proposed rate is 5% for total wealth above £500,000, with the tax payable at a rate of 1% per year over 5 years. This is a low threshold (which includes pensions and personal items with a value above £3,000) and would include many people who would not perceive themselves as being ‘wealthy’.
- It should apply to all UK resident individuals (including non-doms) who were UK resident on the effective date, or resident in at least four of the previous seven years.
- It should apply to trust assets (both onshore and offshore) where either the settlor or any beneficiary is UK resident.
- It should be implemented without warning (and possible retroactively), to prevent people from rearranging their affairs to avoid or minimise their liability under the tax.
Stamp Duty Land Tax (SDLT)
The property market enjoyed an undeniable boost from the SDLT holiday (which temporarily raised the threshold for paying the tax from £125,000 to £500,000). It has been reported that the number of property transactions have already started to slow down as the deadline of 31 March 2021 for the end of the SDLT holiday draws near. Extending this relief would be a very popular move, but so far, the UK government has not indicated whether they are inclined to do so.
From 1 April 2021, non-UK buyers of property will be subject to a 2% surcharge on residential property transactions. This will be in addition to the 3% surcharge for additional residential properties and 15% rate for corporate purchasers. The new rules introduce specific SDLT residence tests to determine the status of a non-UK buyer. They are broadly drafted and will apply to apply to non-UK resident individuals, non-UK companies, non-UK trusts and non-UK funds (subject to certain exemptions). It is important to note that UK resident close companies can also fall within these rules if they satisfy a non-UK control test.
Whatever news Mr Sunak imparts on the 3 March, it is more important than ever for high net worth individuals to seek specialist advice about optimising their tax efficiency, and planning for the future. Many individuals are not averse to paying tax, particularly at the current time, but the government will be aware that the wealthy have the flexibility of voting with their feet and moving elsewhere, if they consider the changes to be too extreme.