Tax reform is on the way
The Budget will be held on 30th October. It appears that some taxes will be going up. We will update you on the tax rises we already know about (for example, VAT on private school fees). But where else can Rachel Reeves raise revenue? In the election campaign, she promised not to raise the rates of Income Tax, National Insurance, VAT and Corporation Tax.
There are perhaps three main areas she will look at.
Inheritance Tax (IHT) is long overdue for major reform. For example, the allowances for lifetime gifts have not risen since the tax was first introduced almost forty years ago. Such reform could include a reduction in the many reliefs that are available. This is particularly true for the 100% relief for qualifying businesses (which currently includes many quoted on the AIM market on the London Stock Exchange).
The extra IHT break for leaving a home to a direct descendant, relieving up to £350,000 of value per married couple, was only introduced in 2017. It is immensely complicated in its detail and could conceivably be abolished. Perhaps this could be done with an increase in the normal nil rate band (which has been frozen for the best part of twenty years) as partial compensation.
However, IHT is payable on only a small proportion of estates. Hence, any changes will probably not raise huge amounts of extra tax.
There may also be significant changes to CGT. This is in addition to the ending of the tax breaks for furnished holiday lets, which has already been announced. Business asset disposal relief could be completely abolished. In the recent past, the maximum tax saving was reduced from £1 million to £100,000 by the Conservatives. It is possible that the rates of CGT will be raised, perhaps even to align them with income tax rates. This is something formerly done by Conservative Chancellor Lawson in the 1980s. Again, though, such changes will not bring a vast amount of extra money into the Exchequer purse. The Chancellor would have to consider the effect of higher rates on people’s investment decisions.
The third likely area for potential change is pensions tax. This might be possible to generate a lot more income for the government. George Osborne was part-way through reform of this area when the Brexit referendum intervened. Currently, tax relief is given at the taxpayer’s marginal rate of tax. So higher and top rate taxpayers benefit a lot more from this relief than basic rate taxpayers. Although, some top rate taxpayers have relief restricted. Restricting tax relief to a flat rate of 20% for everyone would bring in many extra billions of tax each year. In some eyes, it would also make the system more “fair”. Presumably, any such change would not apply retrospectively to pension contributions made before Budget Day.
Changes to the rules on pension withdrawals, perhaps including a reduction in the amount of tax-free lump sum you can take, may also be considered. Other tax reliefs may go, particularly where there is no great evidence that they help to produce their intended economic consequences. An example might be the generous 50% income tax relief for investing in start-up companies via the Seed Enterprise Investment Scheme. Anyway, that is all for the (near) future. In this newsletter, we outline a number of recent tax developments. This includes updates on claiming tax repayments, Construction Industry Scheme (CIS) compliance, and a tax case on pool cars. We are here to help, should you have any questions about what you read below. Please get in touch if you want to discuss anything.
