Platforms must prepare for the inevitable tax consequences of Covid
With the ongoing global pandemic continuing to loosen the government’s purse strings, Head of Technical Support, Neil MacGillivray looks at the Chancellor’s potential recovery options and the impact it could have on how advisers use platforms…
According to the Office for Budget Responsibility, the cost of the Covid-19 pandemic is likely to be more than £300bn, just for this financial year. To put this into context, before the crisis the Government was expecting to borrow about £55bn for the whole 2020-21 financial year, but it borrowed more than £100bn in the first two months alone.
Chancellor Rishi Sunak has already indicated that tax rises will have to be implemented, but no indication has been given as to what taxes will be impacted or when.
In a recent report by former Chancellor Sajid Javid and the Centre of Policy Studies titled “After the Virus – A plan for restoring growth”, over 60 wide ranging recommendations to help re-build the economy are given. In relation to tax, there was some good news in that any large tax rises were seen as a blockage to recovery.
The report requests that the Government take the opportunity to review the UK tax system, focussing on delivering only ‘moderate’ increases in revenue over the medium-term. The aim being that the burden of taxation should shift away from income and investment in favour of fairer more progressive taxation of property and, unsurprisingly, tightening reliefs for the wealthy.
The only two potential increases recommended were an immediate review of council tax and the introduction of fixed rate tax relief/bonus on pension contributions, which the Government has since been ruled out for at least a year.
Here’s are some of the other areas the Chancellor may look to for financial recovery:
Income Tax, VAT & National Insurance
Of the estimated £634.7bn raised in taxes in 2019/20, almost 75% was generated from these three taxes alone. The easy option for the Government to generate substantial additional income would be to apply any tax rises here. However, they have pledged that there will be no increases in the rates of these taxes over this parliament, so, unless due to the exceptional circumstances they feel there is justification for a U-turn, there should be no changes in the short term.
Capital Gains Tax (CGT)
The generous taxation treatment of capital gains has long been in the sights of opposition parties. The rates of 10% for basic rate taxpayers and 20% for additional and higher rate taxpayers is seen as too generous. The rates could move into line with those for income tax of 20%, 40% and 45%. Also, the possibility of a reduction or removal of the annual CGT exemption currently at £12,300. (Update 12 November: The OTS has just supported such reforms).
This would leave dividends as the only income paying lower rates of tax of 7.5%, 32.8% and 38.1%, so increases could be bundled into changes to CGT, thus taking away any tax rate advantage.
If these changes were to take place, then tax wrappers such as pensions, ISAs, onshore and offshore life bonds would likely be in greater demand.
It must be noted that CGT for 2018/19 brought in £9.2bn, less than 1.5% of total tax take, so increases would have to be considerable to make any marked dent in borrowing.
Inheritance Tax (IHT)
IHT makes up less than 1% of total tax paid – £5.4bn in 2018/19 – and currently only about 5% of estates pay it.
IHT is officially the least popular of all the main taxes. Having said this, it’s seen as easy to avoid with careful planning and it is often referred to a voluntary tax. There have been recommendations by several think tanks that we move towards a Lifetime Receipt Tax, which is payable by the recipient of the gift. The Resolution Foundation’s Intergeneration Commission in their report titled “Passing on – Options for reforming inheritance taxation” published in May 2018 stated that based on their recommendations of the two million people who received an inheritance in 2015/16:
• 140,000 (7%) would have paid tax
• Only 10,000 (0.5%) would have paid the higher rate of 30%
• If the regime was introduced in 2020/21:
– It would generate £11bn compared to IHT of £6bn
– By 2030/31 it would generate £21bn as opposed to IHT of £13bn
Based on previous Conservative Party policies any major changes are unlikely, as it impacts their core, older supporters. Would the cost of Covid19 be enough to change their minds?
If implemented, it would bring an end to the popular acceptable IHT planning schemes.
This would be a completely new tax applied to as wide a range of capital assets as possible.
The economics unit of Manchester Metropolitan University estimated that if all personal wealth suffered a one off 2% wealth tax, around £300bn would be generated and the Public Sector Net Borrowing Requirement (PSNBR) challenge would be “sorted”.
Wealth taxes in other countries are rare. They are seen as difficult to administer and collect.
Prime Minster Boris Johnson has recently stated that there would be no wealth tax in the UK, but he also has a track record of making bold promises that sometimes don’t come to pass. Who remembers his wish to introduce the £80,000 basic rate tax band?…
Predicting the outcomes of budgets is a risky business. What is clear is that tax rises are on the way but may not come into play until the next parliament. The delay is likely to come down to two factors, giving the economy a chance to recover and the cost of borrowing is currently low.
The changes introduced in budgets can bring opportunities or be the death knell to financial products. Look at the introduction of pension freedoms and the impact on the annuity (in particular impaired life annuities) market.
The potential threat on products could be a driving factor for advisers when considering the platforms they use. Platforms will need to ensure they offer the widest range of tax wrappers because if one is suddenly restricted or removed, savings will simply move to others that are available.
This article first appeared on Money Marketing