BudgetOct 22 2021

Taxing times: What to look out for in next week's Budget

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Taxing times: What to look out for in next week's Budget

Chancellor Rishi Sunak will present his plans for the coming legislative period in his Budget speech next week (October 27), and this could include changes to inheritance tax, capital gains tax and a reshape of the stamp duty system.

Sunak is expected to juggle a number of priorities in his Budget, which includes getting the economy up and running, raising money to deal with Covid debts and focusing on environmental issues across the board.

Martin Bamford, head of client education at Informed Choice, said: “The Chancellor has little wriggle-room to cut taxes or boost public spending on this occasion.

"Sunak has to tread carefully, as the pips are already squeaking following the recent NI tax rise, the rising cost of living, and economic uncertainty hitting businesses.”

So what tax changes could be in his sights?

1 Inheritance tax and death benefits

The reform of IHT has been on the table for a while with both the Office of Tax Simplification and an All Party Parliamentary Group suggesting changes should happen. 

Areas of focus for reform have included the rules on lifetime gifts, the exemptions, and the CGT-free uplift on death.

But are changes likely?

Tim Morris, independent financial adviser at Russell & Co said: “We’ve seen the NRB frozen at £325,000 since 2009 and will now stay at that level until 2026 so that’s the same as a tax increase. Especially with property price increases and the RNRB has only partially addressed that issue. So for me, I would prefer no change here.”

Heather Owen, financial planning expert at Quilter, said those hit by the band freezes will likely be hoping for reform but changes were still unlikely. 

She said: “Despite the fact that the public sector borrowing figures give the Chancellor a little more wiggle room, reform remains unlikely.

"While inheritance tax raises relatively little in comparison to the Chancellor’s growing list of spending projects, a change of this magnitude [scrapping it] is highly unlikely as the Treasury needs every penny it can get right now.”

But there is speculation that Sunak may make pensions subject to IHT on death as currently they are exempt, which has been deemed “too generous” by some.

Tom Selby, head of retirement policy at AJ Bell, said: “Pensions can currently be passed on tax-free on death if the person dies before age 75, and at your recipient’s marginal rate of income tax if you die after age 75.

“Applying a tax to inherited pensions would clearly raise much-needed cash for the Treasury, although how much would depend on whether a protection regime was introduced for existing funds or not.

“If it wasn’t, those who have paid into pension on the basis of the death benefits on offer would understandably feel angry at the rug being pulled from under them.”

2 Dividend allowance 

Sunak may also look to cut the dividend allowance, although this could be detrimental for people running their own businesses.

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “The dividend allowance has only been around since 2016 and has already been cut from £5,000 to £2,000 in that time.

"Reducing it further could be a mistake, not least because the rate of this particular tax is already set to rise by 1.25 percentage points in April.

“It would be a major blow for people running their own businesses and paying themselves in dividends. They’re already one of the groups who struggled the most during the pandemic. Many of them have taken a serious dent to their financial resilience, so this could risk adding insult to injury.”

3 Capital Gains Tax

The Office of Tax Simplification (OTS) finished its review of CGT in May and recommended major changes such as aligning CGT rates with income tax, removing the CGT uplift on death and reducing allowances.

But Ami Jack, head of national tax at Tilney Smith & Williamson, said if Sunak were to make any of these changes it could discourage potential entrepreneurs which would stunt growth and job creation.

She said other options would be a smaller rate rise, say to 30 per cent, CGT rate increases only on disposals of more passive types of investment such as on rental property, and more technical changes to CGT reliefs.

Jack warned against knee jerk reactions: “Any action taken in anticipation of changes does involve significant risk for individuals. For example, CGT rates may not change as they expect, although rates falling is very unlikely, or action taken before the next Budget could be caught by a subsequent change.”

4 Stamp duty

The industry is sceptical as to whether there will be, or should be, any further changes to stamp duty.

Darren Cooke, chartered financial planner at Red Circle Financial Planning, said: “I really hope [Sunak] doesn't do anything with stamp duty, particularly anything to help BTL landlords, in fact I'd rather hope he does the opposite and starts to tax them more but I can't see that happening.

“Frankly he doesn't have much room to manoeuvre, what he should tax, and could tax, property wealth, very high incomes etc. he won't. What he wants to tax he can't without it having other, potentially serious, impacts elsewhere in the economy.”

Despite the Stamp Duty holiday from July 2020 to the end of September 2021 the Treasury has received a significant £13.5bn in revenue from the tax, according to the latest HM Revenue and Customs figures.

The final phase of the tax break – with the threshold having being decreased from £500,000 to £250,000 on 30 June – ended on 30 September.

On the back of this, Jonathan Stinton, head of intermediary relationships at Coventry Building Society, said the budget presented a “real opportunity” for the government to reshape the stamp duty system. 

Stinton said: “Easing the additional financial burden would make a huge difference to home buyers, not just those looking for their first home but for homeowners wanting to downsize. And reducing the extra cost of Stamp Duty for these homebuyers would mean a more stable and predictable property market.

“We also expect this to be a ‘green’ Budget, with a very heavy focus on environmental issues across the board. We think that the proposal from the Green Finance Institute should be seriously considered by the Chancellor as part of his Budget plans, to encourage sellers to make green improvements to their properties, which would help reduce the impact of the housing market on the environment.”

5 Income tax and NI increases 

The Chancellor must avoid a third round of income tax and NI increases, warned Steven Cameron, pensions director at Aegon.

The government has spent a huge amount supporting individuals and businesses throughout the pandemic and has always been clear that this will have to be paid for. And it has already tinkered with a variety of personal taxes. 

In his Spring Budget, the Chancellor froze income tax thresholds until April 2026, meaning more people will pay more income tax, especially as wages rise with increasing levels of inflation.  

On top of this, the social care funding deal means individuals alongside employers will pay an extra 1.25 per cent in National Insurance from April 2022, as well as an extra 1.25 per cent dividend tax. 

“While government finances look challenging for the years to come, and with the prospect of a winter of sharply rising prices, we’d hope the Chancellor will avoid a third round of income tax or NI hikes in the October Budget," said Cameron. 

amy.austin@ft.com

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