The cost of COVID: tax rises in the Budget?

This post is part of our Entrepreneurial team’s regular series of blogs.

In seven weeks, the Chancellor will deliver a Budget to the House of Commons that is widely expected to contain tax rises. There is, as there always is, excitement as to which taxes and by how much. The majority of commentators over the last few months – me included in December – seem to align with the theory that Covid support must be paid for and that the two taxes most likely to face increases are Capital Gains Tax (CGT) and Corporation Tax (CT).

CGT is divisive. Politically troublesome at least. Some people believe that it should never have been introduced (as it was in 1965) because investments can only be made using income on which tax has already been paid – so CGT provides a second bite of the cherry for HM Treasury.

Others think that it is a legitimate tax, but is rightly assessed at lower rates than Income Tax.

Still others believe that it should be increased to align with Income Tax rates. At present, there is a considerable difference between these rates, with the majority of gains taxed at 10%-20% while Income Tax is charged at 20%-45% in most of the UK and 19%-46% in Scotland.

The Office of Tax Simplification recommended in November to move the CGT rates to 20%-40%, whilst simultaneously reducing the annual exemption from CGT from around £12,000 to around £3,000. Taxpayers paid £9.5bn in CGT in 2018/19, so, in theory at least, there is around £10bn a year in extra tax up for grabs, should the government choose to move on these recommendations.

CT is also divisive, but for different reasons. It provides an opportunity for governments to make their country a destination of choice for companies to base themselves – companies that then hire staff, who pay income tax, national insurance and VAT when they buy things, stimulating the economy. The net receipts from these taxes dwarf those from CT, thus, perhaps counter-intuitively, lower rates of CT are more commonly seen as progressive and opportunistic. Kind of a loss leader. Ireland, with its 12.5% CT rate, is the most relevant example of this as it has firmly established itself as a competitor, albeit a friendly one, to the UK.

So, that is the theory, but what about the practice?

Fact: the UK is going to need money. Lots of it. COVID support is running the UK – and the global economy – into a borrowing spree the likes of which has not occurred in my lifetime.

Ask ‘the man on the street’ what they’d prefer – owners of assets and companies paying more tax, or a penny on Income Tax? – and I will bet all the money in my pockets that they would say the former. So when tax rates need to move, it seems likely it will be CGT and CT.

But we find ourselves again in a national lockdown. Officially this will run until the end of January in Scotland, with the option to extend, and in England the Prime Minister hinted yesterday that maybe this would be closer to Spring. Millions are furloughed. Is 3 March, when there is every chance the country will still be locked down, really the time when Mr Sunak will make his move? I am not so sure.

I am sure, however, that the only way to guarantee the current CGT rates will apply is for assets to be disposed of before 3 March. It is, at least in part, for this reason that we are currently seeing unprecedented levels of corporate restructuring activity – Mergers and acquisitions, Management Buy Outs, Share Repurchases and Employee Ownership Trusts being established. It makes sense to move now, all things being equal. But seven weeks is not much time to get a transaction through. There is much to be done.

Tax planning ahead of Spring 2021 Budget

As we approach the end of 2020 we can reflect on a tumultuous year as a result of the Covid-19 pandemic. As seen recently in the financial press, there are a number of speculative discussions about possible future tax increases. While tax increases are possible, it is also clear that the Government will need to take steps to encourage investment, to boost the economic recovery.

At this time, we can only speculate about possible tax changes in 2021 however, we do know that changes to taxation will be announced in the Spring Budget, which will take place on 3rd March 2021. Rather than leave the usual year-end tax planning until February next year, it would be prudent to bring forward this process. If you are anticipating a quieter than usual festive period, it could be the perfect time to turn your attention to financial matters.

The Chiene + Tait Tax Team has flagged some areas that may be of interest to you or your business including gifting of assets to members of your family, pension planning if the higher rate tax relief is removed from contributions or what to look out for if you are thinking of selling your business.

Our infographics below highlight further areas for consideration. If you would like to discuss selling your business, please contact Jonathan Griffiths, if you would like to discuss any tax aspects for your family, please contact Michelle Fallon or Moira McMillan. Alternatively, please email us at mail@chiene.co.uk, we would be delighted to discussion the options available to you, your family or your business.

Areas families to consider Spring 2021
Family areas to consider ahead of 2021 Budget
Business areas to consider 2021 Budget
Business areas to consider ahead of 2021 Budget

Money and death: the essentials of succession planning

Succession planning is crucial if a family’s business and personal wealth is to continue to grow from one generation to the next. Finding the right time to bring up the subject of money and death can be hard; there are often hurdles to be overcome and difficult decisions to be made. The main issues that arise are when to pass on assets, the structure to provide flexibility over who ultimately benefits and how to retain control over the gifted assets.

HM Revenue & Customs recently commissioned a research report to understand gifting behaviours. Individuals with wealth of more than £500,000 were more likely to make lifetime gifts than the less wealthy, and not surprisingly nearly a quarter of those aged over 70 had made gifts in the previous two years. Having considered a number of factors including marital status and children, the analysis found that only age and wealth were significantly associated with the making of lifetime gifts. Interestingly, the primary reason for gifting was a wish to help the next generation rather than to save Inheritance Tax (IHT).

Even if your motive is to minimise tax on death, no planning can be undertaken without considering financial independence and other taxes. Parents will not want to pass on their business or personal wealth if they cannot afford to. For many this means putting in place sound remuneration, pension and investment strategies long before gifting is contemplated.

Many business owners may not understand the tax implications of extracting profit from their business. Taking a relatively small salary could still provide a qualifying year for the state pension, but without the need to pay national insurance contributions, which can be over 20% of salary. Income can be topped up with dividends, which attract a lower tax rate for the owner / director, and the retirement fund can be boosted by contributions to a pension.

For those wishing to invest long-term, selecting a tax-efficient corporate structure may allow for income to be reinvested tax-free, and for investment income or capital gains to be used for pension contributions. Such structures can also provide a bespoke vehicle for passing wealth to the next generation and, if required, tax-free access to the capital contributed.

Recently, the Government asked the Office of Tax Simplification (OTS), an independent adviser to come up with a list of options for simplifying IHT. Suggestions included:

  • Replacing the gift exemptions and the relief for gifts out of income with a single lifetime and personal gift allowance;
  • Reducing the period after which gifts are exempt from IHT from 7 years to 5 years;
  • Abolishing the reduced rate of IHT where a person dies within 7 years of the gift but survives more than 3 years;
  • Removing the tax-free uplift for capital gains tax if there is an IHT relief on death. This would largely affect the transfer of businesses and agricultural property.
  • Bringing furnished holiday lets in line with income tax and capital gains tax so that they qualify for IHT exemption.

Currently there are no definite plans to implement any of the proposals.

If succession planning isn’t on your radar, I would encourage you to think about it as soon as possible. Setting clear objectives, holding discussions with your family and timely implementation are key. Feel free to contact me at hazel.gough@chiene.co.uk or call 0131 558 5800.

Non-Resident CGT regime continues to cause a headache for taxpayers (and HMRC!)

Stephen Baker in our Personal Tax team outlines that the lack of publicity for the Non-Resident Capital Gains Tax return has seen a huge rise in individuals falling foul of the filing requirement.

Since 6 April 2015, non-resident individuals are liable to UK Capital Gains Tax on the disposal of UK residential property. Such disposals must be reported to HM Revenue & Customs (HMRC) within 30 days by way of a Non-Resident Capital Gains Tax (NRCGT) return. Penalties arise if the return is submitted late.

Despite rules being in existence for over 3 years, there continues to be a large number of individuals falling foul of this filing requirement. Recent published tribunal cases on the issue suggest that the reason for late filing is largely due to the short 30-day timescale for reporting and a general lack of awareness of this deadline.

In most cases where penalties have been levied, by the time the taxpayer realises that a return is required, it is likely that multiple late filing penalties are already accrued (even in cases where the CGT due is zero). For example, if a return is filed 12 months late on a disposal on which no tax is due, a total potential penalty of £700 may arise, comprising of a £100 late filing penalty and two £300 tax geared penalties.

A number of taxpayers have appealed against these penalties by bringing a case to the tax tribunal. From these appeals, a number of interesting outcomes have emerged. As would be expected, ignorance of the rules is not a reasonable excuse and the tribunal has stated this in several cases, although initial tribunal rulings were somewhat critical of HMRC’s lack of sufficient promotion of the new regime and found in favour of taxpayers in a couple of appeals on this basis. More recent tribunal decisions however, have found in favour of HMRC and concluded that lack of awareness of the change in law was not a reasonable excuse.

Despite the trend of cases in favour of HMRC, there were several smaller wins for taxpayers:

  • In cases where there were multiple disposals and subsequent multiple penalties, the tribunal has reduced or eliminated some of these penalties. It was found that there had been no chance for the taxpayer to learn from their first mistake (i.e. filing the return for the first disposal late) and therefore charging penalties for additional disposals would be unfair.
  • The tribunal analysed the penalty legislation in great detail and held that any tax-geared penalties should not exceed 100% of the actual tax due. Therefore, if no NRCGT is actually payable, penalties should be restricted to the initial £100 late filing penalty. It will be interesting to see how this point develops as the legislation applies to other taxes also.

Going forward it appears that there will need to be an increased awareness of the requirement to file a NRCGT return within 30 days. Although this is a requirement that tax advisers should be aware of, clients tend to notify advisers of transactions after the tax yearend (when a NRCGT return is likely to be already long overdue). This problem has the potential to become more prominent; currently there is a proposal to extend the 30-day reporting limit to both Non-resident commercial property disposals and to residential property disposals by UK residents.

It will be interesting to see how HMRC deal with any further appeals on this matter, but in the meantime, if you have any queries regarding NRCGT, please do not hesitate to contact me or one of the Personal Tax Team at Chiene + Tait on 0131 558 5800 or email mail@chiene.co.uk.