Tax Rises Likely in Spring Budget

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The unprecedented levels of Government borrowing mean that it is likely that taxes will have to rise for the Government to balance the nation’s books. Here we look at the options facing the Chancellor and highlight the actions which investors can take before Budget Day on the 3rd March.

Are Tax Rises Inevitable?

I believe some tax rises, or reductions in allowances, are likely to be considered by the Government to repay some of its debt or it will be shifting the burden of Government borrowing on to future generations. However, the Chancellor has a balancing act to achieve, he will not want to raise taxes which stifle consumer demand, as this could make any recession deeper. Consequently I believe it is unlikely that there will be an increase in VAT, income tax or the rate of national insurance. The Conservative’s 2019 Manifesto ruled out increases to these taxes and even though the Government could reasonably argue that Covid-19 changes everything, big rises in these taxes would have an immediate impact on domestic consumption.

It is more likely that the Chancellor will look at those taxes which do not affect people’s every day spending power but can be raised on realisation of capital profits when  assets such as a share portfolio, investments not held in an Individual Savings Account,  land or a second home or buy to let property is sold or gifted. Capital gains tax is levied on capital  profits and over recent years the rate of tax paid has been reduced, while the tax free allowance has increased, so that for many investors it is possible to realise gains either with no tax to pay or a top rate of no more than 20% ( 28% on residential property not a main residence).

Proposed Changes

The Office of Tax Simplification (OTS) has recently made proposals to the Government for the reform of capital gains tax, most of their proposals would result in an increase in the tax take if implemented.

These include:

  • Reducing the tax-free annual allowance from £12,300 of gains to £3,000,

  • Aligning capital gains tax rates with income tax rates, an increase from 20% to up to 45%, (28% to 45% on residential investment property)

  • Abolishing the uplift in value of assets left in an estate, so that the whole gain would be taxed on the disposal of inherited assets.

We illustrate the impact of these proposed changes in the example below:

Joseph owns invested funds worth £50,000 today, which have grown from £20,000 saved. His gain is £30,000 and he has income of £60,000 a year. His wife Isabel has no investments outside of her ISA and so has no taxable gains or losses, her income is £30,000 a year. If Joseph sells his investments his capital gains tax bill is:

Gain £30,000 – Allowance £12,300 = £17,700 taxed at 20% = £3,540 tax to pay.

But if Joseph gives Isabel £29,500 of the invested funds, keeping £21,500 himself their tax bills on sale are

Joseph Gain £12,300 – Allowance £12,300 = no tax to pay.

Isabel Gain £17,700- allowance £12,300 = £5,400 taxed at 10% = £540 tax to pay.

If OTS proposals are adopted

Joseph’s tax bill on selling the funds would be:

Gain £30,000 – allowance £3,000 = £27,000 taxed at 40% = £10,800.

If Joseph gives Isabel £45,000 of the invested funds, keeping £5,000 for himself then they both sell, their tax bills would be:

Joseph Gain £3,000 – Allowance £3,000 = no tax to pay.

Isabel Gain £27,000 – Allowance £3,000 = £24,000 taxed at 23.3% = £5,600 tax to pay.

Possible Impact of Tax Proposals

  • A single investor could see their tax bill grow from £3,540 now to £10,800.
  • A married or civil partner couple could see their tax bill grow from £ 540 to £5,600.

Action Now?

Of course, these proposals may not be adopted into legislation, so nothing may change. However, given the generous allowances and low rates of taxation available now, it could be worth realising gains on long standing investments before Budget Day in order to benefit from the current rules. If married or a civil partner, gifts to each other are exempt and both allowances can be used, providing ownership of the asset is altered prior to sale. Proceeds which are then reinvested into an Individual Savings Account are tax free thereafter, with each adult able to invest up to £20,000 per tax year this way.

To assess your liability to capital gains tax on your investments and consider whether you should take action before the Budget (March 3rd) contact your usual Aspira adviser or info@aspirafp.co.uk Tel 01454 632 495.

Kay Ingram                             
Public Policy Director
January 2021        

The Financial Conduct Authority does not regulate Taxation advice, The levels bases, and reliefs from taxation are subject to individual circumstances and may be subject to change.  HMRC Taxation rates current for tax year 2020/21

Please remember, no news or research item is a recommendation or advice to buy. Aspira Corporate Solutions is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.  

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