Earlier this year we looked at the parallels between the aftermath of World War Two and the current coronavirus pandemic.
In both cases, the government had no choice but to borrow substantial amounts to fund the effort. And, the Chancellor must be seen to be regaining control of the public finances without penalising those people on the front line – soldiers, airmen and sailors in 1945 and NHS staff, care workers, retail employees and bus drivers today.
In recent weeks there has been plenty of speculation that some taxes will rise as Rishi Sunak tries to fix the black hole in the public purse. Here are two of the most likely reforms, and what you can do now in advance of any changes.
Using your Capital Gains Tax exemptions and allowances now could be wise
Last month, the Chancellor fired the starting pistol for possible tax reforms by commissioning a review of Capital Gains Tax (CGT). Rishi Sunak has asked the Office of Tax Simplification (OTS) to consider the overall scope of the tax, the rates which apply, and the allowances and exemptions.
While CGT currently raises less than £9 billion for the Treasury, there is plenty of opportunities for the government to increase the scope of the tax. Research from Hargreaves Lansdown has revealed that chargeable gains (before the Annual Allowance) came to £57.9 billion in 2017/2018, but the tax paid was only £8.8 billion.
Reforms that could be on the Chancellor’s agenda include:
- A rise in the rate of CGT. Currently, the top rate of the tax is 28% (for residential property) and so the rate could increase to this level for all gains
- Aligning CGT and Income Tax rates, so taxpayers pay CGT at 20%, 40% or 45%
- Taxing capital gains at the same rate as dividends. Currently, dividend income from shareholdings above £2,000 is taxed at 7.5% (basic rate), 32.5% (higher rate) or 38.1% (additional rate)
- Removing the exemption for primary residences. This exemption costs the Treasury £26.7 billion a year and so homeowners could be forced to pay CGT on the same of their main home, perhaps above a certain threshold?
We expect that the review into CGT complete before the Chancellor delivers his next budget, so changes could be set to come this year. With potential reforms just a few months away, what can you do now?
- Consider crystallising any gains between now and the Budget in November. You could make the most of your tax-free CGT allowance (£12,300 in the 2020/21 tax year), meaning you can make gains of up to this amount without paying any tax
- Ensure you’ve maximised your investment into tax-friendly vehicles such as pensions and ISAs (gains made within these are free from CGT)
- Think about using ‘bed and ISA’. Here, you would sell shares or investment funds held outside an ISA and then rebuy them within an ISA wrapper, meaning your holdings will then be immune from CGT
Reforms to pension tax relief could hit higher earners
Another possible reform that has been on the government’s radar for some months now is a change to pension tax relief. The former Chancellor, Sajid Javid, was keen to make the system fairer and his successor could bring these changes to fruition.
At present, you receive tax relief on any pension contributions you make. The amount of tax relief you receive on your pension contributions depends on the rate of Income Tax you pay, and so higher and additional rate taxpayers get a bigger top-up than basic rate taxpayers.
Pension tax relief costs the Treasury around £38 billion a year in lost Income Tax revenue. And, a report by the Pensions Policy Institute found that half the value of the available pensions tax relief is claimed by the 15% with the highest incomes (over £60,000).
The most likely course of action is that Rishi Sunak will reduce higher and additional rate tax relief on pension contributions and replace these with a flat rate of relief, applicable to everyone regardless of earnings. This could be at the same level as basic rate tax (20%) or some commentators have suggested a higher rate of 30% or 33%.
The bolder option is to abolish tax relief on pensions altogether and make them more like ISAs: Tax relief would be given at the point you draw your pension, not at the point you contribute.
Why diversification is about tax as well as assets
Successive governments have made changes to the tax system in the UK. In general, you’re never more than one Budget away from a tweak or reform, and what might be a useful exemption today could easily be scrapped tomorrow.
A good example of this is the way that the taxation of Buy to Let properties has changed over recent years. Rather than encouraging private landlords to create rental homes, recent governments have increased Stamp Duty and reduced the tax relief available to landlords, making it much less profitable to own investment property.
For this reason, we are always very keen to build ‘diversification’ not only across your investments but also across the ‘tax wrappers’. The aim here is to mitigate precisely this kind of reform and to reduce the impact of the abolition of reliefs or exemptions.
Our view is always that wherever you invest, you should never put all your eggs in one basket. The government often changes the rules, and so making sure you have a diversified portfolio means you never lose all your exemptions or allowances on the whim of a Chancellor.
Get in touch
With possible changes coming later in 2020, it could pay to utilise the current tax reliefs, allowances, and exemptions before the Budget. If you’d like advice on the right course of action for you, please get in touch. Email email@example.com or call us on 01189 876655.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The interest rates at the time you take your benefits could affect your pension income. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.