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  • Jo Bateson, Partner |

4 min read

The question of how to tax capital in the UK is a complex one that in the last few months is top of the list when discussing personal taxes. I entered the world of private client tax in 2000 as an economics graduate wanting to understand the inner workings of the UK’s tax system and fascinated by the impact of tax changes on the economy. Rarely have personal taxes been so much in the spotlight as the Chancellor’s 3 March 2021 Budget approaches. Although I think that it is unlikely that he will raise capital gains tax (“CGT”) rates on Budget Day or indeed introduce a one-off wealth tax, he could choose to set the agenda for the remainder of the Parliament and there is lots pointing towards capital being taxed more heavily than previously.

What about IHT?

Prior to March 2020, I would have said that substantial reform to inheritance tax (“IHT”) was high on the agenda as it is has remained largely unchanged since it was introduced in 1984 as a replacement of Capital Transfer Tax. Furthermore, as I set out in my article, IHT has been the subject of much attention in recent years, from think tanks, an All-Party Parliamentary group and even the Office of Tax Simplification (“OTS”), at the request of the Chancellor. While it seems likely that more significant reform is on the horizon to make IHT fit for current and future generations, this is not a quick job so I expect that the Chancellor may choose instead to announce a review but not rush through any major changes. That said, the changes to business property relief proposed by the OTS may attract his attention as a simplification that is also a revenue raiser (albeit in small amounts). IHT overall does not raise substantial revenues and represents less than 1 percent of tax revenues so if the Chancellor’s focus is on how to raise more tax from capital rather than on how to make the transfer of wealth fairer, changes to CGT are more likely. 

Will CGT rates increase?

Do I think that the Chancellor will increase CGT rates from 3 March? Before Christmas, I would have said that it was a significant possibility but with lockdown 3 this now seems much less likely. This is not to say that it won’t happen – as my article outlines there is an argument for pre-announcing a rise to CGT rates to generate short term demand and bring forward tax payments.  There is also an argument to align CGT rates with income tax and tightly focus reliefs where they can have the biggest impact. As IHT and CGT are so closely linked, in my view it is important that any changes to either tax are considered alongside the other, otherwise it can really alter behaviour.

The global comparison is also key but can be tricky - headline rates of tax are easily comparable, although that sometimes hides a more complex picture involving allowances and reliefs. For example, the UK’s headline IHT rate is 40% which is at the upper end globally with only Japan, South Korea and France being higher, but these countries do reduce the rate for assets passed to spouses and children so the headline rates alone are not a good global comparison. The same applies for CGT – the UK’s main rate is 20% which appears fairly low globally but we do charge 28% on residential property and carried interest which is more in line with other countries that charge CGT.

The Resolution Foundation published a report in May 2020 on the wealth gap between the rich and the poor in the UK and said that some of the disparity is due to the wealthy realising a higher proportion of capital gain compared to income which is not accurately recorded in the UK’s income statistics. You could argue that increasing CGT rates in line with income tax would deal with this disparity and indeed this was one of the key recommendation of the Office of Tax Simplification but, as they also set out, the answer is more nuanced than this. I doubt that CGT rates will increase as high as 45% at least not on all assets but it could rise to 30% which would still be a globally competitive rate.

What about wealth taxes?

Another possibility that has been considered in recent years is the introduction of a Wealth Tax.  Most recently in December 2020 with the recommendation of a one-off wealth tax by the Wealth Tax Commission, a non-government sponsored commission.  As I have highlighted on a previous occasion, a wealth tax would be quite a significant change to how the UK taxes capital and the wealthy in particular but the data for potential tax revenue is not something that can be ignored. The Chancellor could choose to focus his efforts on property – the UK continues to tax property significantly and this is unlikely to change. I wrote an article in November 2018 on land value tax most of which is still relevant today. There was a reference then to a wealth tax and this does seem to be theme that is gaining prominence among some economists. One possibility could be the introduction a wealth tax just on real estate and financial assets similar to the French system but in my view this would need to be part of a wider reform of other taxes such as council tax and Stamp Duty Land Tax.

It seems there may be gathering momentum for the Treasury to focus on the question of how to tax capital in the UK and perhaps to undertake a more radical reform of our current system. This might be driven by the eye watering revenues that a one-off wealth tax could generate or by the fact that the majority of the voting public at the next general election will be under 30 years old and the issue of intergenerational fairness is becoming a more significant political issue. In my view, not much of significance will change for these taxes on 3 March but change is coming.

Interesting