Wealth Tax Proposals and paying for the impact of Covid-19
As the nation looks to life post-COVID-19, the Chancellor will no doubt need to turn his attention to how the UK pays for the debts incurred. The Office of Budget Responsibility (OBR) has published an independent estimate stating that overall borrowing will be as high as £349bn by the end of the financial year in March 2021.
Whilst the borrowing was unavoidable to prevent a complete economic meltdown, the national debt now stands at around £2trillion or around 99.4% of GDP, the highest debt to GDP ratio since the end of the 1962 financial year.
The Chancellor's hands may be tied by Conservative manifesto commitments, which previously ruled out increases in the three biggest UK taxes: Income Tax, National Insurance and VAT. These taxes typically add around £500bn to the Government purse in an average year.
The Chancellor is still left with an array of options to raise additional income and reduce the deficit, as we near the all-important 2021 budget:
Corporation Tax – a rise to the taxes imposed on businesses may be tempting as it avoids taxing individuals. Currently, Corporation tax generates approximately £60 billion per year, and the main rate has gradually dropped from 28% in 2010 to 19% at the time of writing.
Whilst it is recognised each 1% increase could raise around £3 billion, increasing taxes on businesses could slow the recovery from the pandemic and Brexit.
Property Tax – taxes currently paid on property in the UK include Council Tax and Stamp Duty Land Tax. Proposals to combine both taxes into a single property tax would be deeply unpopular in the south of the UK, where property prices tend to be higher.
Fuel Duty – although a five pence increase in fuel duty has been suggested, it would prove very unpopular, with the rate having been frozen at 57.95 pence per litre for the last decade.
Capital Gains – a 2020 review into the operation and impact of Capital Gains Tax, commissioned by the Treasury, found that an increase might be able to double the £10 billion which the tax currently brings in.
Options suggested in the report include: raising the tax charged on the sale of assets such as property and shares to bring it in line with income tax, abolishing the tax-free uplift on death for certain situations, lowering the floor above which the tax has to be paid, and abolishing the relief on share disposals in unlisted companies.
Inheritance Tax – the rules have been under review since 2018 and the Office of Tax Simplification has suggested changes to how lifetime gifts are taxed, and has recommended the alignment of Business Property Relief rules with Capital Gains Tax rules.
Wealth Tax – perhaps the most radical suggestion is the introduction of a wealth tax, which would raise income for the government and be seen to be addressing the issue of wealth inequality in the UK. In 2020 the independent Wealth Tax Commission, set up by the London School of Economics and Warwick University, published a report examining the feasibility of introducing a one off wealth tax targeting the richest in society.
In April 2020 the Wealth Tax Commission began an evidence gathering process which involved commissioning a network of experts such as academics, policymakers and tax practitioners to produce more than thirty papers looking at both the theory and practice of a wealth tax. Published in October 2020, these papers represent the largest collection of evidence on the topic ever gathered, including theoretical study and real-world examples.
The report found an annual charge of 1% on assets worth over £500,000 would impact 8 million residents of the UK while raising over £260 billion – raising the same amount would require a 9p increase in the basic rate of income tax or a 6p rise in VAT.
The Chancellor has previously appeared to be against a wealth tax, which in turn has fuelled speculation that an increase in Capital Gains Tax is now the most likely outcome in the Budget.
If you have any questions relating to how Inheritance Tax and Capital Gains Tax changes might impact you, please get in touch with Sarah Nash, an Associate Director in the Wills, Probate and Trusts team here at Ansons on 01543 267981 or email her at snash@ansonssolicitors.com
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