Spring Budget 2021 - Future UK tax landscape

Growing (not taxing) our way out of the economic crisis - for now

Despite the dire state of the public finances as a result of the COVID-19 pandemic and the measures introduced by the government to support the economy, the tax rises anticipated by some, in particular to capital gains tax, have not materialised – not yet at least. 

In the Budget, the government chose to introduce a number of measures designed to stimulate the economy, in particular, business investment. Please see our business tax measures article for further details.

The government has honoured its manifesto pledge not to raise the rates of income tax or national insurance contributions, choosing instead to freeze the following allowances and thresholds from April 2021 to April 2026:

• income tax personal allowance - at £12,570 
• higher rate income tax threshold - at £50,270 
• inheritance tax (IHT) nil rate band - at £325,000 
• capital gains tax (CGT) annual exempt amount - at £12,300 
• pensions lifetime allowance - at £1,073,100

Freezing the CGT annual exempt amount will have far less of an impact on individual taxpayers than an increase in the rates of CGT to bring them in-line with income tax rates, which was widely anticipated. The vast majority of taxpayers who declare gains each tax year report net gains close to their annual exempt amount.

Is a reform of capital taxes on the horizon?

While no increases in the rates of, or changes (radical or otherwise) to, capital taxes were announced there is growing momentum for a reform of CGT and IHT and we anticipate that, in the longer-term, the government is likely to look to these taxes to raise additional revenue.

The Office of Tax Simplification (OTS) published the first of two reports on CGT in November 2020 following a request from the Chancellor for a review of the tax. Recommendations made in the first report - on the policy design and principles underpinning CGT – include:

• increasing CGT rates so they are more closely aligned with income tax rates - together with the re-introduction of a form of relief for inflationary gains (like indexation relief)
• removing the capital gains tax-free uplift on death where assets benefit from IHT relief, and replacing it with a form of hold-over relief in other cases (so that the person inheriting an asset is treated as acquiring the asset at the historic base cost of the person who has died)
• abolishing or refocusing certain CGT reliefs including business asset disposal relief (formerly entrepreneurs’ relief).

Calls for IHT to be reformed have come from across the political spectrum. An all-party report published in early 2020 called for radical changes, including the introduction of a 10% flat rate of IHT on all lifetime gifts and gifts on death, the abolition of all exemptions (with the exception of the spouse/civil partner exemption and the exemption for gifts to charity) and reliefs, including business property relief.

The Treasury Committee report following its inquiry into ‘Tax after Coronavirus’, published on 1 March, also recommends reform of capital taxes.

There has also been considerable discussion in the press about the possibility of a one-off wealth tax to help balance the public finances, following the publication of the Wealth Tax Commission's report in December last year. The report suggested that a one-off wealth tax of 5% on total wealth (minus mortgage and any other debts) above £500,000 per individual (£1 million per couple if split equally), payable at 1% per year over five years, would raise at least £260 billion. The Chancellor has publicly rejected the idea of a wealth tax (and the recent Treasury Committee report highlighted that its administration and development would be "extremely challenging" and recommended against its introduction). But with the Office of Budget Responsibility (OBR) projecting a budget deficit for 2020-21 of around £400 billion and possible public sentiment in its favour, the idea of a one-off tax take of nearly £300 billion may seem too attractive to ignore. 

Look out for our article on a possible wealth tax next week.

If so, when?

The increase in the rate of corporation tax from 19% to 25%, announced in the Budget, is to take effect from April 2023 (at the same time as a number of new reliefs come to an end). The Chancellor clearly anticipates that the UK economy will have recovered sufficiently by then to absorb tax rises. The OBR has stated that it now expects the economy to return to its pre-COVID level by the middle of next year.

However, changes could be announced much earlier than that. Further tax policy announcements are to be made on 'Tax Day' (23 March 2021), with the government promising documents and consultations on 'important but less high-profile measures'. A second Budget is also expected in the Autumn.

Sustaining the buoyant property market

The buoyant property market is helping to support the economy. With this in mind the so-called stamp duty land tax (SDLT) "holiday" is being extended until the end of September.

Reduced rates of SDLT currently apply on the first £500,000 of the purchase price of residential property – these were due to come to an end on 31 March 2021 but will now continue to apply until 30 June 2021; with the reduction lessening from 1 July 2021 to 30 September 2021 when the first £250,000 of the purchase price of residential property (double the normal level) will be subject to SDLT at 0%.

The 3% SDLT surcharge for purchases of additional dwellings applies on top of the revised standard rates; the 2% surcharge for purchases by non-UK residents which is due to come into force from 1 April 2021 will also apply on top of these revised rates (and the 3% surcharge). 

Reducing the tax gap – every penny counts 

At a time when public borrowing is at the highest it has been outside of wartime, the government is even more committed to ensuring that all tax due is collected.

The tax gap (the difference between the tax that should be paid and what is actually paid) for 2018/2019 was the lowest on record.  It is not yet clear what impact COVID-19 will have on the tax gap. 

Since 2010 the government has introduced over 100 measures to tackle tax avoidance, evasion and other forms of non-compliance and this focus continues. The government has pledged £100 million and 1,000 investigators to set up a new HMRC taskforce to tackle fraud in COVID schemes and further investment in HMRC to tackle tax avoidance and evasion. 

The ability to obtain information and documents from taxpayers and third parties has been key to HMRC's success in tackling avoidance and evasion. There is to be a further extension to HMRC's civil information gathering powers with the introduction of Financial Institution Notices (FINs). FINs will be used to require financial institutions to provide information to HMRC when requested about a specific taxpayer, without the need for prior approval from the tribunal. The information sought will have to be reasonably required for the purpose of checking a known taxpayer’s tax position and HMRC will be required to tell the taxpayer why the information is needed, unless a tax tribunal rules this condition should not apply. A financial institution that does not comply with a FIN may face penalties.

At the same time there is a move towards treating taxpayers who make genuine mistakes or who are not seeking to abuse the tax system more fairly. Proposed changes to the penalty regime for failing to file and late payments are intended to make it fairer and more consistent. The current regime penalises different behaviours in the same way; the new regime will penalise frequent offenders but offer greater leniency for occasional slip-ups.