The General Election is over – what does this mean for taxation? The quality of debate in the pre-election period was extremely poor. The Conservatives kept saying Labour would put up taxation, Labour said they would not increase the rates of certain taxes.
Having dealt with many Chancellors over the years we are fully aware that trying to outguess a Government is not usually successful.
Labour have pledged not to increase the rate of Income Tax, National Insurance and VAT and will not increase taxes for working people. The key point here is, it is the rate of tax that is pledged not to change, not the scope.
In reality, it is only the above three taxes which raise significant monies for the Government. Corporation Tax does contribute, but Capital Taxes raise very little. For example, Inheritance Tax matches the expenditure on funded childcare
What could the new Government mean for tax?
We know that VAT is to be introduced on School Fees, we have not seen any other areas suggested.
For Income Tax there could be a reduction in the ISA limit or even savings being fully taxed again, possibly in the name of “compliance”. Increasing tax on savings is not regarded as a tax on working people.
Capital taxes likely to attract biggest change.
There has been much speculation as to whether the rate of Capital Gains Tax (CGT) will increase. The top rate is 24% for gains on residential property or 20% on gains on other assets. There are suggestions that these rates should be aligned with Income Tax rates. This has happened before, in 1988 Nigel Lawson aligned the rates but then we had indexation to rule out inflation gains and gains before 1982 were excluded.
In 1998 Gordon Brown introduced taper relief whereby short-term gains were taxed at Income Tax rates but with lower rates depending on how long you had held the assets. Given the manifesto commitment that carried interest gains made by Private Equity Funds will be taxed as income, taper relief may be the way forward.
A word of warning, any increase can be introduced from budget day. (N.B. we don’t know when budget day is – keep an eye on Labour MP’s going to the betting shop!!) In 2010 the Coalition Government increased CGT on budget day.
We do not know what to predict but think it is safe to say the rates won’t come down.
The other tax up for grabs in Inheritance Tax. There may be some simplification on allowances and we may go back to different rates that existed up to 1986. Certainly Labour have said they want to make the Inheritance Tax more focussed on inheritances. At present an estate will pay the same amount of IHT whether £1m is left to one person or if £1 is left to a million people.
A potential change could be the reduction or capping of Business Property Relief (BPR) and/or Agricultural Property Relief (APR). In most cases the reliefs, save 100% of IHT, excluding the value of businesses or agricultural land from Inheritance Tax.
There is a suggestion that these currently unlimited reliefs could be capped at £500k or £1m. Our view is that in the current climate it is difficult to justify APR for non-working farmers, why should farmland be a favoured asset?
Tax planning is not always easy.
If somebody gives away a business or farm during their lifetime this would be a potential exempt transfer. Should they also die within seven years this transfer would only be covered by BPR/APR if the asset transferred still qualifies at the date of death.
Also, if there is a lifetime transfer the transferee inherits for CGT purposes at the original value acquired by the transferor. Therefore, current planning is to leave transferring the asset until death, should be IHT tax free but with an uplift for CGT purposes.
To summarise, we do not have a crystal ball. Whilst the current tax being collected is extremely high as a percentage of GDP, the actual rates are quite benign compared to historical figures. We cannot speculate with certainty but are here to advise and plan as appropriate.