The recent headlines flagging the cost of the UK’s triple lock for pensions have highlighted the dilemma currently facing the UK’s chancellor of the exchequer, Rishi Sunak. While the inclusion of three separate measures of inflation to help protect pensioners’ incomes is laudable, the recent spike in the consumer price index (i.e. one of the measures used to calculate increases alongside growth in average earnings or a guaranteed 2.5%) could be seen to have come at an inopportune time resulting in a potential increase in state pensions by as much as 8%.
This is because the UK government’s borrowing to support the economy during COVID-19 remains too high for many in the Conservative party. In June 2021 alone, HM Treasury borrowed £22.8 billion and, although that number was lower than May’s £24.33 billion, Sunak is understandably reluctant to add an additional £3 billion – the expected cost of the state pension boost – to the highest total of public sector borrowing since records began in March 1946.
After all, having said yes to an NHS pay rise of 3% in England and having also committed to not raising the rates of income tax, national insurance or value added tax in the current parliamentary session in the 2019 Conservative election manifesto, where would the additional funds come from?
This debate inevitably leads to a renewed focus on the three capital taxes: capital gains; inheritance tax; and stamp duty land tax. So what should you be aware of when planning your finances?
2020 saw the first review of capital gains tax (CGT) completed by the Office for Tax Simplification (OTS) and many believed it would pave the way for changes to be made in the following UK Budget. Instead, however, the only change announced in the March 2021 Budget was to freeze the annual exemption until 5 April 2026.
CGT remained as before, i.e. payable at different levels depending on the type of investment transaction, as per the table below:
Exemption | Residential property | All other chargeable assets | |
UK individual paying basic rate income tax | £12,300 | 18% | 10% |
UK individual paying higher or additional rate income tax | 28% | 20% | |
Trust | £6,150 | 28% | 20% |
You also still do not have to pay CGT on personal possessions (known as chattels) if they are sold for less than a £6,000 profit, or at all if they are exempt, e.g. classed as ‘wasting chattels’, which includes clocks, cars – including the classic variety – and wine.
And although Sunak chose not to implement any of the four main proposals detailed in the first report, the second report (published in May 2021) provides 14 practical recommendations for changes, and which are worth a look despite remaining unimplemented.
Some of its recommendations focus on the extension of current timelines. For example, those who have finalised a divorce only have until the end of the tax year in which separation occurs to transfer assets between them without paying CGT. There is also a suggested increase to the 30 days in which you have to register the sale of any property and pay any outstanding taxes due. These are both welcome proposals.
Its other recommendations range from setting up single customer accounts to replace personal tax accounts (which would encompass CGT matters) through to the resolution of small issues often faced by UK businesses and investors.
Even if Sunak were to leave the overhaul of the full CGT regime to a later time, the 14 proposed changes should be relatively straightforward to implement and some, or all, of them may be included in the Autumn Statement planned for November 2021. However, the chancellor could choose to wait until the UK 2022 Budget, at the earliest, when individuals and businesses have had more time to recover from the negative impacts from the COVID-19 pandemic, and economic growth is on a firmer footing.
Another tax relatively untouched in March 2021 was inheritance tax (IHT).
As before, everyone has their ‘nil-rate band’, i.e. an allowance of £325,000, which they can pass on tax free when they die to anyone or anything. The extra allowance in the ‘residence nil-rate band’ (RNRB) of £175,000 also remains available for those passing on a residence in which they have lived to direct descendant(s), i.e. children, grandchildren and stepchildren.
And although the March 2021 budget again saw the allowances frozen until 5 April 2026, no other changes were made aside from two minor amends to the probate process.
As such, any unused allowances can still be transferred to the surviving partner (known as the transferable nil-rate band). And UK-domiciled spouses or civil partners (only) can continue to receive any assets gifted by their significant other during their lifetime or on death, without a limit in value, free of IHT. As before, non-domiciled spouses or civil partners have to ‘opt in’ and be treated as UK domiciled to benefit from a similar exemption.
In addition, the important restrictions with regard to the RNRB continue. Aside from cousins, nephews and nieces being excluded from the entitlement, the RNRB is reduced by £1 for every £2 the estate exceeds the£2 million threshold.
So, if the estate of a loved one who has died is worth £2.35 million or more at any point before 5 April 2026, the entire RNRB is lost. And that £2 million threshold ignores other exemptions and reliefs, e.g. any agricultural and business property relief which would otherwise have kept the estate under the £2 million mark.
The limited changes with regard to IHT were surprising to some as the OTS had made recommendations on the reform of IHT in 2018, 2019 and 2020. And because the government had also received a critique of the tax by the all-party parliamentary group in 2020.
For the time being, therefore, we only have the minor changes made to the probate process to implement (where non-taxpaying estates do not have to complete IHT forms to obtain probate and the removal of physical signatures on IHT returns), both of which are welcome but are far from the major reforms we might expect in the coming years.
Last but not least, stamp duty land tax (SDLT) was also relatively untouched in the March 2021 Budget.
Here, the changes encompassed the extension of the ‘holiday’ on transactions up to £500,000 in England and Northern Ireland from its original end date on 31 March 2021 until 30 June 2021. Now this period has expired, home buyers and investors are able to access a lower level of relief, for transactions up to £250,000, until 30 September 2021.
In addition, it’s important for overseas buyers to understand that this extended relief only applies in England and Northern Ireland, whereas the original incentives to keep the property market moving were also available (albeit via slightly different schemes) in Scotland and Wales, which both have their own building and land tax schedules.
No other changes were made, either to the underlying tax or to tax changes that were due to come into force. So, for example, the introduction of the additional 2% surcharge for non UK residents was introduced from 1 April 2021. And the higher rates of SLDT for purchases of buy-to-lets and/or second homes continued to apply.
Aside from the capital taxes, the other potential change on the horizon is tax reform in relation to the funding of social care, with some in the government favouring a rise in national insurance contributions. We will hear more about this in the coming months, but this potential change is not without controversy as it potentially results in increasing intergenerational unfairness as it places a higher burden on younger workers. Whatever the outcome, taxes will need to rise to fund social care.
Meanwhile, it is also always advisable to review your finances to ensure you are maximising your allowances and reliefs where applicable, and in consideration of the potential tax reforms on the horizon, as well as making sure your affairs are set up to reflect your individual circumstances now and in the future. Please contact us if you would like to discuss your affairs with our experienced team of wealth planners.
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Sources: Nedbank Private Wealth; HM Treasury; UK Government; and the Office for Tax Simplification.
We do not offer a tax advisory service and nothing in this article constitutes tax advice. We would always recommend you seek professional tax advice in relation to the impact of any investment structure or transaction on your personal tax position. We are, however, happy to work with your tax advisers, or to provide an introduction to a suitable tax adviser should you wish.
Any examples of investments and structures used are for illustrative purposes only. The inclusion does not constitute an invitation or inducement to buy any financial investment or service. None of the content constitutes advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.
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