Reforms to taxes: an update
10 / 12 / 2021
There continues to be much speculation on how the UK Government (and global governments) will pay for the costs of the pandemic, and if and when significant tax rises will be implemented.
In the UK, prior to the pandemic, in January 2020, the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness had already recommended an overhaul of inheritance tax (“IHT“). Following the pandemic, in November 2020 the Office of Tax Simplification (“OTS”) recommended reforms to increase the capital gains tax (“CGT”) take and in December 2020 the UK Wealth Tax Commission reported on options for a private wealth tax.
The Conservative Government pledged in its election manifesto that it would not raise income tax. Many people therefore anticipated reforms to IHT and rises in CGT through a direct increase in the current historically low tax rates and by the removal of the CGT free base cost uplift on death (as recommended by the OTS).
To date, and for the time being, the government has rejected by implication the idea of a private wealth tax* and has indicated changes to IHT will not be made in the short term **. Aside from some administrative changes to the CGT and IHT tax systems introduced on the government’s “Tax Day” on 30 November 2021, the main increases to taxes were announced ahead of the Autumn Budget 2021. An increase of 1.25% on both national insurance contributions and the dividend tax rate, designed to help fund a new system of social care as well as support the NHS, was announced in September 2021; and an increase in the corporation tax rate from 19 to 25 percent to take effect from 1 April 2023 was announced in the March 2021 Budget.
The Chancellor has avoided the expected tax increases to CGT and instead suspended increases in tax allowances across the board: the personal allowance for income tax, the annual exempt amount for CGT, the IHT nil rate band and the IHT residence nil rate band are all frozen until 5 April 2026. The Treasury is clearly relying on “fiscal drag” to further increase revenue. As inflation rises, this will have a notable impact on the tax take; however, the need for more revenue will remain. The government has yet to reject the OTS recommendations on raising the rates of CGT and reform in the future cannot be ruled out. As the only certainty seems to be that CGT will not decrease it is wise for clients to make use of the low rates of CGT whilst they can.
*16.11.2021 Financial Secretary to the Treasurer, Lucy Fraser QC MP
responded to a question on whether the Chancellor would publish a
response to an opposition early day motion to introduce a wealth tax,
noting that the UK is already “among the top of the G7 countries for
wealth taxes as a percentage of total wealth”.
** 31.11.2021 HM Treasury letter to the OTS