On March 23, which has been dubbed “tax day”, HM Treasury will announce a raft of new consultations on proposed taxation reforms.
Therefore, advisers may still have to navigate tax reforms which are introduced to pay for the Covid crisis.
According to industry experts this could see changes made to capital gains tax, inheritance tax as well as solving long-running issues in the pensions space.
CGT reform
Reform to capital gains tax has been on the cards ever since Rishi Sunak commissioned a review into CGT by the government's Office for Tax Simplification last year, saying he was particularly interested in how the levy interacted with taxes on income.
As the OTS has already backed the idea of aligning CGT and income tax rates, it would be “no surprise” to see this picked up by the Treasury next week, Tom Selby, senior analyst at AJ Bell said.
However, he noted that the Treasury has said any announcements will not have fiscal implications, meaning the most we can likely expect is a consultation or call for evidence rather than concrete proposals for reform.
Neil Jones, tax and wealth specialist at Canada Life, said CGT needed to be simplified but he was aware the OTS hadn’t published its second report into this area so big changes may not be coming just yet.
Jones said: “Minor variations, such as increasing rates, will only be dabbling. The government needs to set out a clear policy objective so that it can identify the taxpayers it wants to target, only then can it build an effective tax system.
“Arguably more consideration needs to go into how to transition from the current system to a new one and consultations can help with this.”
Meanwhile, Steven Cameron, pensions director at Aegon, said any reform of CGT would “present some complex trade-offs” between different groups affected and the Chancellor may decide to formally consult on this.
Pensions tax issues
There are a few outstanding issues with pensions which industry experts have said need to be addressed by the government.
One of these is the net pay anomaly which occurs in the pensions tax relief system and means low earners are missing out on a 20 per cent boost on their pension contributions if their scheme operates a net pay arrangement, which is the case with the majority of pension funds in the market.
In July, the Department for Work & Pensions published a 40-page call for evidence which presented the options being considered to address the difference in outcomes between net pay and relief at source pension schemes, as announced at the Budget.
Selby said tax day could present an opportunity for the government to set out a way forward and consult on the practical challenges that need to be overcome.
He said: “Clearly the main focus here needs to be on ensuring all workers receive the pension tax relief they are entitled to, although policymakers will likely also be mindful of avoiding layering extra burdens on employers currently operating net pay schemes for auto-enrolment.”
But Pete Glancy, head of policy at Scottish Widows, said it would be a difficult issue to solve.
Glancy said: "While this might sound relatively simple, the implications for pension schemes operating on a ‘net pay’ basis would be quite significant and potentially insurmountable.
"For example, would the payroll industry have to evolve to calculate ‘semi-gross’ contributions for higher earners, or would contributions continue on a ‘gross’ basis with HMRC having to recover overpaid tax relief from millions of people?
“The implications could involve moving all pension schemes to ‘relief at source’ and that could take several years to implement, plus the challenge of ironing out ‘double taxation’.
" In the UK, the principle is that no-one should pay tax on the same pound twice, so if higher earners have only benefited from relief at 20% when the money went into their pension pot – but their overall income in retirement means that their marginal rate of relief is higher – this would breach that principle.”
Another issue is emergency tax rules when savers withdraw funds from their pensions.
Andrew Tully, technical director at Canada Life, said: “Many individuals who make a lump sum withdrawal from their pension initially receive a lower amount than expected due to HMRC imposing emergency tax.
“While the individuals can reclaim this overpaid tax, it isn’t simple for people to understand, and means people may take a further withdrawal from their pension when they simply don’t need to.”
Selby said to give an idea of the scale, in 2020 around 38,000 official reclaim forms were processed by HMRC.
In the same year, more than 600,000 people flexibly accessed their retirement pot for the first time.
“While those who took a regular income should have had their tax code adjusted automatically, anyone who didn’t will have been overtaxed,” he said.
IHT reform
The OTS has published two reports making recommendations aimed at simplifying IHT including around gifts, while a group of MPs has also published a paper with more radical proposals calling for a complete overhaul of IHT.
This could include bringing death benefits from pensions into scope of IHT.
But Cameron said this would be at the “extreme end of the spectrum” and would come with a “multitude of knock-on consequences” going against the pension policy objectives of encouraging people to save adequately for retirement.
Cameron said: “Death benefits from pensions are currently typically paid at the discretion of trustees or scheme administrators and are free of IHT.
“When saving in a pension, the vast majority of people are doing so to provide a retirement income, rather than to pass on an inheritance. Bringing accumulated pension funds or 'death benefits' into an individual's taxable estate on death would seem particularly harsh and unjustified.
“We need to encourage people to save more into pensions so creating a possible tax liability for ‘good behaviour’ would be highly counterproductive.”
Canada Life’s Jones has instead suggested that a quick win for the chancellor would be to remove the residence nil rate band and replace it with an increase in the standard nil rate band.
Jones said: “The residence nil rate band was introduced in 2017 as a way of the keeping an election promise but it introduced multiple layers of complexity and only favours those who own property and who have children – this is not fair in a tax system.
“As estate planning is often planned many years ahead of someone’s death any changes can impact existing arrangements. Care therefore needs to be taken with any potential changes as it could render perfectly bona-fide planning redundant meaning that plans would have to be revisited and it may no longer be possible to carry out someone’s wishes.”
amy.austin@ft.com
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