Five possible tax hikes in 2021 and how to prepare for them today
The shackles of social distancing measures, which have uprooted much of our everyday lives, could at some point on the horizon be loosening as talk of a possible Covid-19 vaccine intensifies.
As well as raising the hopes of millions across the world, a vaccine will enable the government to safely unlock the economy – releasing a wave of pent-up consumer spending that will allow businesses to re-open.
This kickstarting of our economy will undoubtedly mean the chancellor’s gaze will begin to shift away from monetary support towards tax rises as he looks to begin paying back the historic debt left by the pandemic.
Below are some of the ways the government may look to generate a bigger income through tax rises. I would strongly urge readers to reflect on their tax planning now, before the almost inevitable rises that will be included in the next Budget in March 2021.
Inheritance Tax (IHT)
I anticipate the potential abolition of Potentially Exempt Transfers (PET), essentially the ability to make a gift of unlimited value that is exempt from Inheritance Tax (IHT) if you live for another seven years.
This could be replaced with an immediate lifetime inheritance tax charge upon making the gift. If the recommendations made by the APPG (the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness) in their report released in January are taken on board, that could mean a rate of 10-20% where a gift exceeds £30,000.
So, if you’re thinking of making a substantial gift, it would be advisable to consider doing it sooner rather than later. Action taken in anticipation of changes does, however, involve significant risk as changes may not be introduced as expected.
Capital Gains Tax (CGT)
An increase in the rate of Capital Gains Tax is very likely, even more so following the recommendations from the Office for Tax Simplification for CGT this month. This could represent a significant restriction for those passing on their wealth, making it much more expensive to gift to their children or grandchildren.
This would also affect those looking to sell residential property, as the rate of CGT could go up to 45% if aligned with income tax rates. If you are looking to sell over the next year, you may want to accelerate that sale to take advantage of the current tax regime.
However, a key potential downside to consider is that selling now accelerates the tax charge, meaning you pay tax based on the property’s current value. Therefore, if the property drops in value, you could be in a worse position.
Restrictions on pension contributions
Pension contributions are ripe for tinkering – either by limiting the level of tax relief or creating a tax relief hybrid, resulting in us all receiving the same relief of say 30% for example rather than getting a 45% relief on current contributions through re-claiming.
Pensions are already very confusing and making more changes will mean people understand the system even less. We need a set of reliable and consistent pension rules to ensure people feel confident in saving for the future.
The real danger is that these cuts will lead to a drop in the amount that people contribute to their pension pot, particularly at a time when people may already be dipping into savings and pensions to meet current living costs.
Introduction of a wealth tax
There has been much speculation around what this would mean for higher earners and a potential wealth tax could take many forms.
The government could introduce a tax across all wealth, but it is more likely to target certain asset types. It could take the form of a mansion tax on certain types of properties such as high value homes or rental properties for instance. This could have a severe effect on owners of property businesses, especially if net rental receipts are insufficient to cover the wealth tax. Property investors might then find the situation to be non-viable and look to exit their businesses.
Restrictions or removal of Business Property Relief (BPR) and Agricultural Property Relief (APR)
The APPG paper released in January called for the scrapping of both reliefs but this feels like an unpopular sector to go after at this time.
I think these reliefs are unlikely to be abolished in the Budget but might be in the future and we may see some more minor changes more imminently. For example, currently, you can invest in Alternative Investment Market (AIM) shares to get BPR but this could be reviewed.
Also, businesses and farms can currently pass from one generation to another, never incurring an IHT or CGT liability so that if the recipient sells shortly after inheritance, they may get a completely tax-free exit.
It is possible that there could be changes to withdraw the beneficial CGT treatment in these circumstances.
Julia Rosenbloom is tax partner at Smith & Williamson LLP