Basing tax planning on predictions is never wise. None of us has a crystal ball and the great cliché of tax advice is “never let the tax tail wag the dog”.
Despite that, the forthcoming Budget is likely to contain some significant changes. The Government has already made it clear that it wants to raise taxes to help reduce the nation’s £22bn hole in the economy. Their manifesto stated that it did not intend to attack taxation of income – Income Tax, National Insurance, Corporation Tax and VAT. This leaves only the capital taxes of Capital Gains Tax and Inheritance Tax. They are also likely to want to restrict allowances and withdraw reliefs. We have already seen a forerunner of this with the cancellation of the Winter Fuel Allowance.
Pensions
Currently pension contributions attract income tax relief at a taxpayer’s highest rate of tax. Pensions can also grow and earn income free of tax, benefit from a tax-free lump sum withdrawal of 25% of the scheme value and can be passed on tax free at death.
This is clearly a very benign tax regime and so open to reform in the Budget.
It has been widely reported that future contributions may only receive tax relief at the basic rate. There is a possibility that the allowance of a tax-free lump sum on 25% of the scheme value could be withdrawn. Similarly, the tax free status on death seems generous.
Planning points to consider
Pay a lump sum pension contribution before the Budget
If appropriate to your circumstances, take your tax-free lump sum
Capital gains tax
Capital Gains are currently taxed at up to 24% on residential property and 20% on other capital assets. The annual tax-free band has been reduced over the past few years so that it is now minimal.
There is every indication that the rate of tax will be changed. It is possible that Capital Gains will simply be treated as the top slice of a taxpayer’s income and so be taxed at 40% or 45%.
If the Chancellor were to take an extreme position, gains within ISA’s could also become taxable.
Private Residence Relief is an unlikely area for reform. An individual’s home has always been treated as a protected asset. It is generally viewed that it would not be equitable to introduce a cap on the relief, given the disparity in house values between different regions of the country.
Planning points to consider
Review assets to identify any which could be sold/transferred in advance of the Budget
Don’t simply sell assets to pay tax at 20% unless you live off your capital
“Bed and Breakfast” assets held in an ISA if the gain is significant and the dealing costs are not expensive
Inheritance tax
More estates are now falling within the scope of Inheritance Tax, largely due to the restriction of reliefs and asset
value inflation.
Before the Election, the Shadow Labour DEFRA minister indicated that there would be no changes to Agricultural Property Reliefs for farmers. But this left unclear the future treatment for non-farming owners of agricultural land. We would certainly not advise any rushed pre-Budget actions, particularly as many landed estates already have advanced tax planning in place.
Business Property Relief currently has a broad scope and in some circumstances beyond, what many would consider, pure business assets. There is every likelihood that some restrictions could be imposed. In particular, AIM shares, currently tax free on death, could become taxable. Perhaps also even minority shareholdings in non-quoted companies could be caught.
Planning points to consider
Pass AIM Shares to the next generation and apply for CGT deferral relief. But note that the donee will acquire the shares at the base cost to the donor, not the current market value. This will make any future Capital Gains larger on disposal.
Summary
Undoubtedly the forthcoming Budget is likely to contain a number of unwelcome changes that will impact on our clients. We may be able help with some planning to help overcome possible changes. Please free to contact us to discuss anything that concerns you.
The points made in this circular are broad in their nature should not be relied upon without further detailed information and advice that may be specific to each client’s personal circumstances. SJC Chartered Accountants are not responsible for any actions taken by clients or 3rd parties based on this circular.
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