Tax burdens

While weather forecasting has been steadily increasing in accuracy, unfortunately the same cannot be said for predictions of what will be happening in the world of tax. Nevertheless, the following may give some food for thought, if not pointers with guaranteed accuracy, regarding what might be in store for the future.

The Office of Tax Simplification has been working on a number of ideas and continues to do so. One recommendation included in its Final Report on the Review of Tax Reliefs in March last year was that there should be a ‘top-down’ review of inheritance tax since it was, in the words of the Mirrlees Report, “a somewhat half-hearted tax”.

Although (at the time of writing) there has been no government response to this, it is clear that the OTS has not forgotten about it, as John Whiting, its tax director, mentioned it in his report to the Treasury select committee in November last year.

Although he suggested that inheritance tax be replaced by a tax based on recipient beneficiaries, it might be even more attractive to abolish it altogether. This would certainly result in very positive headlines for the Coalition Government.

However, in these straitened times with a massive deficit to address, this would not be possible without some balancing measure. Might it be possible, for example, to amend capital gains tax to remove not only the uplift on death but also the relief on a taxpayer’s principle private residence?

Clearly, to avoid the housing market grinding to a complete halt, there would need to be some sort of holdover relief where a principal private residence is sold and replaced by another within, say, two years. Fanciful? Perhaps. Many transfers are made in cash, for example, so there would be no capital gains tax liability. Less outlandish, maybe, would be to adopt the approach suggested by the OTS, similar to the Irish capital acquisition tax, for example but, in addition, it might be tempting to merge the two main forms of capital taxes, IHT and CGT, into one.

George Osborne has indicated more than once that the 50 per cent additional rate of income tax is temporary. Although William Pitt the Younger introduced income tax as a temporary measure over 200 years ago, it is hoped that the additional rate will not enjoy the same longevity. If we can look forward to the abolition of 50 per cent income tax in the near future, what implications does this have for current investment strategies? For those clients who are currently paying the additional rate, it would be sensible to defer income tax liabilities on investments until the disappearance of the 50 per cent band. This is one of the features of investment bonds, where no personal liability to income tax arises until a chargeable event occurs. Indeed, as far as an offshore bond is concerned, there is virtually no tax within the life fund (other than a small amount of withholding tax), giving the benefits of gross roll-up. Additionally, there is the benefit of being able to take tax-deferred partial withdrawals each year of up to 5 per cent of the amount invested, meaning that a chargeable event can be deferred until the 50 per cent income tax rate disappears.