Capital taxes under the spotlight
  • Greg Limb, Partner |
3 min read

With the Spring Budget fast approaching, the Chancellor of the Exchequer faces quite a task.

Rishi Sunak has conflicting priorities to juggle: keeping the economy afloat on one hand and restoring public finances on the other.

With the country in its third lockdown, I’d expect him to favour protective rather than rebalancing measures come the third of March. But the £400 billion hole in the public purse will have to be repaired at some point. In his budget speech, Sunak may at least signal how he intends to do so. 

A capital focus

There are plenty of options open to him (something our Head of Tax and Legal, Vicki Heard, examined in her recent blog).

He could choose to impose a one-off, targeted tax on those with accumulated wealth, or on a specific sector such as financial services. This may prove divisive, however.

Alternatively, he could make changes to existing taxes – though he may feel restricted by his party’s pledge not to raise the ‘big three’ (Income Tax, National Insurance and VAT). That would still leave him scope to increase corporation tax or pause inflationary adjustments to personal taxes.

He could also overhaul how property is taxed, as  has been trailed in the media – though that’s probably a longer-term prospect.

Finally, he could focus on capital taxes. While not expected to be imminent, significant changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT) are thought to be firmly on the Chancellor’s radar. 

Never had it so good?

The UK’s capital tax regime is certainly ripe for reform (see my colleague Jo Bateson’s article on the outlook for CGT in particular).

Critics point out that CGT and IHT don’t work effectively together; and that their treatment of businesses and individuals is out of step with our 21st-century society and economy.  

It’s also fair to say that where capital taxes are concerned, the UK taxpayer has very rarely had it so good.

The UK’s CGT rate is currently just 20%, and there are generous IHT reliefs for certain assets. In addition, assets are passed on at death at their current market value, not their purchase price. That potentially wipes out a sizeable CGT exposure for those fortunate enough to inherit assets.

In this context, both CGT and IHT have recently been reviewed by the Office of Tax Simplification (OTS) – leading to proposals that would have far-reaching implications for our private clients. Some of the key recommendations of the OTS’ reviews include, abolishing or updating the conditions for various tax reliefs, bringing CGT to a more comparable level with income tax and removing CGT uplift on death.  Broadly, this would mean that people disposing of assets, say, shareholders selling their companies or passing assets to the next generation would be subject to higher rates of tax than they at present.

How closely Sunak will follow these recommendations remains to be seen. There are blunter instruments he could reach for – such as abolishing all existing IHT reliefs and exemptions and introducing a flat-rate gift tax payable both on lifetime and death transfers, as suggested by the All Party Parliamentary Group in January 2020. But in my view, that would miss a much-needed opportunity to modernise the country’s capital tax landscape.

Time to act

Of course, any changes to CGT and IHT are likely to impact private clients’ personal tax affairs both on a business and personal level. Which is partly why I’m seeing many of them take stock

Alongside the pandemic, the prospect of capital tax reform is prompting them to reflect on their own and their families’ futures.

Many are reviewing their business strategies and structures and their succession and legacy plans. And they’re accelerating schemes to dispose of assets, or pass them to the next generation.

A typical outcome has been to sell a part of the family business, which may have thrived during the pandemic - while its value is high, and the CGT rate remains low. Then put a succession strategy in place for the next generation to build on the remaining business in the long term.

This shouldn’t be done without expert technical advice, however. The capital tax regime is generous, but it’s also complex. There are pitfalls that can trap the uninitiated, leaving you with unexpected tax exposures.

That said, I’d advise all private clients to reflect on their situation at this point in time. Capital taxes are likely to be reformed at some point. Individuals need to start preparing for change – and the time to act is now.

For further information please visit Personal perspectives or contact your usual KPMG contact.