The pandemic has resulted in UK and worldwide government spending on an unprecedented scale. In the UK, the estimated spending on the pandemic is expected to reach £372 billion* and UK debt is running at a record high of £2.17 trillion. The big question is: how will the government recoup these costs? There was intense speculation that the March Budget would bring about tax increases, with capital gains tax (“CGT”) and inheritance tax (“IHT”) high on the agenda for a tax hike. These tax changes didn’t materialise; instead, the Chancellor relied on “fiscal drag” – freezing the tax free allowances for income tax, CGT and IHT. Eyes were then fixed on the UK’s inaugural “Tax Day”. Again, no major tax changes were announced.
However, this does not mean that tax changes are not on the cards. The Office of Tax Simplification has recommended changes to CGT including the
abolition of the CGT “uplift” on death and changes to principal private residence relief. Pre-pandemic, early in 2020, an All-Party Parliamentary Group recommended reforms to the IHT regime with the removal of complicated and generous reliefs as a trade-off for a reduction in the current rate of IHT from 40% to 10%.
In December 2020, the Wealth Tax Commission advocated a one-off wealth tax on personal wealth over £500,000 (£1million for a couple) to help pay
for the cost of the pandemic. The Chancellor has repeated that there is currently no intention to introduce such a tax.
The UK government has, so far, chosen stability rather than any headline-grabbing tax changes. In contrast, Joe Biden’s US government has announced a tax plan to increase the tax take on those earning more than $400,000 a year. Whether the UK government will follow suit or continue to rely on fiscal drag to raise the funds it needs to service the country’s debt and pay for ambitious spending plans, remains to be seen.
*National Audit Office