After cancelling the November Budget, what might Rishi Sunak be pondering for its March 3 successor?
On the one hand, the Chancellor needs to raise funds to pay for the huge Government bailouts over the last 12 months. On the other, he needs to get the economy going supported by consumer spending so he cannot take too much out of the system.
He has already reversed a proposed two per cent cut in corporation tax. VAT, temporarily slashed to five per cent for the decimated hospitality sector, will likely follow suit.
It was a manifesto pledge not to raise income tax, VAT or National Insurance though given U-turns galore throughout the Covid crisis who knows if it still applies.
There are hints that tax hikes might be held back until the autumn to allow recovery.
He will know there is an optimal level of income tax above which the take actually declines. Hard to imagine either the headline VAT rate of 20 per cent increasing.
Of all the options, capital gains tax (CGT) stands out. The rates used to be in harmony with income tax but are now much lower and with chunky annual allowances.
Speculation follows the first of two reports from the Office of Tax Simplification.
The current CGT rates are 10 per cent for basic rate tax payers and 20 per cent for everyone else. The proposed changes include adjusting CGT back in line with income tax rates, which currently stand at 20 per cent, 40 per cent and 45 per cent for basic, higher and additional rate taxpayers respectively. Currently, you can realise gains of up to £12,300 within your CGT allowance. It is suggested this reduces to between £2,000 and £4,000.
Wealth management group Investec offers the following example:
An additional rate taxpayer would like to encash £200,000, on which there is a £100,000 gain, to help a family member buy a property. Current rules would see CGT payable on £87,700 of the gain (as £12,300 would fall within their allowance). This would be taxed at 20 per cent, costing them £17,540. Under the proposed new rules, and assuming the allowance was £3,000, CGT would be payable on £97,000. This would be taxed at 45 per cent, costing them £43,650.
What are the potential changes to CGT on death?
Investec states: “An asset originally purchased at £100,000 by the deceased has increased in value to £200,000 at the time that it is inherited by a beneficiary, who is a higher rate taxpayer. Under the current rules, the cost to the original purchaser is deemed irrelevant. CGT would not be payable on an immediate sale as no gain has been made. Under the proposed new rules, the cost to the original purchaser is now very relevant. This would equate to a potential £40,000 charge.”
The Institute for Public Policy Research think-tank estimates that all this could raise an extra £90 billion over five years. Attractive indeed, albeit it may provoke a backlash from Tory MPs and the City.
Also in the Chancellor’s sights could be higher rate tax relief on pensions which takes up a big percentage of all pension tax relief.
There is the very generous annual ISA allowance of £20,000 per person.
Another revenue-raiser would be to levy National Insurance on retirement incomes, which currently enjoy an exemption.
Maximising pension and ISA contributions before April is a must and if you have large capital gains it may be prudent to consider banking some and paying the tax at present rates. You should speak to your adviser about any implications this may have.