18 March 2020
Harold Wilson once proclaimed that a week is a long time in politics, but even he would be shocked to witness the shift in policy that has occurred over the last 4 months, from small-state Thatcherism espoused by Tory campaigners across the country in December to a spending spree in March that would ordinarily result in an unexplained wealth order from the National Crime Agency.
There was much to catch the eye in Rishi Sunak's debut budget, even if on first glance little of immediate interest to the private client practitioner (other than perhaps a sense of cynicism and foreboding as to how the Government intends to fund its vast infrastructure programme should the OBR's future growth forecasts prove overly optimistic).
It is worth noting that this budget was in fact 2 budgets; the first, a £30bn stimulus package to address the most severe of the anticipated economic effects triggered by the Covid-19 pandemic, and the second, a "levelling-up" budget. Given the speed at which the Government has been required to respond to the Covid-19 pandemic, it is perhaps unsurprising and understandable that focus shifted from tax reform to economic support. However, the decision not to include certain rumoured tax policies in the budget will have been made significantly easier due to a quirk in the timing of the 2019 general election, the result of which is another budget scheduled for the autumn of this year. Before practitioners either raise a glass to an absence of any major tax changes or bemoan the lack of influence exercised by the Office of Tax Simplification (OTS), it would be prudent to consider which of the rumoured tax policies have actually been dropped, and which may potentially make a dramatic return in the Autumn.
A summary of the key private client tax considerations arising from the March budget is provided in our "news in brief" section. Here we focus on two significant measures:
The Chancellor resisted calls for the relief to be scrapped, instead announcing with immediate effect (11 March) that the lifetime cap on eligible gains would be reduced from £10m back to the original £1m limit which applied when the relief was introduced in 2008. As a result, any gains in excess of the reduced limit will now be subject to capital gains tax at 20% as opposed to 10%. The relief therefore remains, albeit in increasingly handicapped form – overall this would seem to represent a compromise between scrapping the relief entirely at a cost to SME entrepreneurs, whilst ensuring that it remains affordable. Anti-forestalling provisions applying to contracts which have not yet completed and certain share exchanges which took place on or after 6 April 2019 are not entirely clear on their application and may burn those who acted on the rumours that the relief was to be scrapped entirely. It was also interesting to note that the lifetime limit of £10m which applies to investors' relief remained unchanged.
The Chancellor announced an additional 2% levy on non-residents purchasing residential property in England and Northern Ireland from 1 April 2021, resulting in a top rate of SDLT of 17% for non-resident purchasers who are not acquiring or replacing their main home. Non-residents contemplating purchasing property in England and Northern Ireland may therefore be advised to do so prior to April 2021. Subject to anti-avoidance provisions, mobile non-domiciled individuals may wish to balance the cost of remaining non-UK resident and paying the SDLT surcharge against becoming UK resident to take advantage of lower SDLT rates whilst claiming the remittance basis to mitigate their exposure to other UK taxes.
The recent budget illustrates neatly that budget predictions involve more than a reasonable share of crystal ball gazing. Not to be deterred, what might we expect next time around?
During Boris' leadership campaign, he pledged to consider raising the SDLT threshold from £125,000 to £500,000 and cut the top rate of SDLT from 12% to 7%. However, while SDLT is almost universally disliked amongst the electorate, it is a near perfect tax from the treasury's perspective. Not only does it raise significant sums, but it also costs very little to administer and is very difficult to avoid. Absent the non-resident changes mentioned above, given the Chancellor's economic stimulus needs to be funded in the longer run, it is likely that the current SDLT rates and bandings will remain. Likelihood of reform: Low.
If the rumour mill is to be believed, any revenue lost as a result of SDLT reform needed to be compensated through the introduction of a so called "mansion tax". There was significant speculation in February that the Conservative Government intended to introduce a form of mansion tax, either by way of a levy on properties over a certain value, or more realistically through the introduction of additional council tax bands for the most valuable properties. This policy is the opposite of SDLT insofar as it is generally popular with the electorate, but would be administratively complicated and would raise comparatively little for the treasury. Likelihood of introduction: Low, although a general review and reform of council tax is overdue.
If some taxes are disliked by the treasury, and some are disliked by the electorate, then the current iteration of IHT has the dubious honour of being disliked by both. The majority of the public consider the tax to be unfair and it raises only one sixth of the amount for the treasury than it did 50 years ago whilst also being fiendishly complicated to administer.
The OTS published a second report calling for its reform in 2019, and the All Party Parliamentary Group (APPG) called for a root and branch reform of the tax in January this year. The facts set out in the APPG report make for stark reading: the average rate of tax for an estate with a value of up to £1m is 5%, for estates worth between £6m and £7m, the rate rises to 20%, before falling to 10% for estates valued at £10m or more. The OTS (whose remit is confined to simplification rather than policy) suggested a number of pragmatic amendments, whereas the APPG proposed more radical reform including:
Opportunities to implement tax reform that are popular with the public, significantly simplify existing legislation and administration and raise revenue are few and far between, and we expect the Chancellor to grasp this opportunity with both hands.
Likelihood of reform: High, though such a fundamental reform would take time and care to implement if it is to achieve the desired aims of a workable and fair system. Nonetheless, it would be sensible for individuals to consider now whether changes in line with the APPG proposals, if introduced, would make it worthwhile to accelerate their lifetime planning. Likewise, as the APPG report contemplates, there may be circumstances where the proposals would work in an individual's favour.
We would be surprised if a government that enjoys a significant majority and is set on a "levelling-up" agenda intends to shy away from significant and potentially radical tax reform in the medium term. Combine this with a need to raise funds to support a struggling economy and vast infrastructure spending, and the conclusion reached is that future budgets are likely to be considerably more interesting affairs, at least from a private client tax perspective.