UK Budget 2018: will the Chancellor heed calls to “tax wealth more”?

The Chancellor is in a corner and higher earners are an obvious target. But where exactly is he likely to strike?

25/09/2018

James Gladstone

James Gladstone

Head of Wealth Planning

James Gladstone, Head of Wealth Planning, anticipates the measures the Treasury may take in the upcoming November Budget.

When Philip Hammond stands up to deliver next month’s Budget he will no doubt point to recent reductions in government borrowing and say that the UK’s public finances are improving.

The wider picture is not so reassuring. Total borrowing, having roughly trebled since 2005, remains a problem; but the immediate crisis for Mr Hammond is the urgent demand to spend more on social care, local government and the National Health Service. Prime Minister Theresa May has pledged to increase health spending by £20 billion per year by 2023.

Who is going to pay? The Archbishop of Canterbury, Justin Welby, offered a blunt solution in a controversial newspaper article last month: “Tax wealth more,” he said. His comments were supporting a report from the Institute for Public Policy Research (IPPR) calling for a radical increase in inheritance taxes and in taxes applying to investments. Inheritance tax (IHT) is already uppermost in the Chancellor’s mind: in February he commissioned the Office of Tax Simplification to undertake a review of this “particularly complex” tax. Its conclusions are likely to coincide with the Budget.

With Brexit looming, the Chancellor may not have the appetite for bold or controversial tax increases. But, on the other hand, as highlighted by Justin Welby’s intervention, there is now a mood across the political spectrum which views the better-off as obvious targets.

Inheritance tax: the Chancellor’s choices 

The IPPR suggested a root and branch overhaul of our inheritance tax system. It wants to replace the current IHT free allowances – where a married couple can bequeath £650,000 taxfree at death – with a lifetime gifts tax. Once an individual receives more than £125,000 in lifetime gifts, further gifts would be taxed as income.

We don’t envisage any such systemic changes while the Chancellor has so much else on his mind – but the IPPR’s proposal does highlight the benefit of the current rules which permit gifts to fall outside of the donor’s estate, provided they survive seven years.

This is an exceptionally valuable tax break. It is conceivable however that the Chancellor might limit this perk in some way, for example by extending the seven-year period. More likely perhaps is a rethink of the tax breaks applying to agricultural and business property (including unlisted shares). One purpose of introducing these reliefs was to enable family businesses to pass down the generations without having to be broken up to pay inheritance tax, but the reliefs also now attach to many shares quoted on London’s AIM junior stockmarket. Some of these stocks are now widely used as a tax planning tool.

It’s long been rumoured that this particular concession is in jeopardy, but successive chancellors have left it in place. One reason could be that the removal of the perk from AIM shares would net the Exchequer a modest £710 million per year (see table below, right), making it a less worthwhile move for the challenges it would potentially generate.

Again, he could tweak some of the rules around the exemption that these investments attract. Currently AIM shares must be held for two years to be free of inheritance tax. Other countries impose far longer qualifying periods (effectively restricting the benefit to very long-term holdings), and Mr Hammond might follow suit. Again the rewards for the Exchequer would be slight.

We think it unlikely that the current IHT tax exemption threshold (£325,000 per person and £650,000 per married couple) will fall. Historically, the UK’s major parties have competed with each other to raise these thresholds – and a reverse even in these difficult times would be deeply unpopular. Although the main residence nil rate band, that extends this £650,000 up to £1 million for those bequeathing residential property to family members, remains an unnecessarily complex arrangement that, by result (and I suspect by design), is underutilised by many.

The biggest tax breaks are difficult to unwind 

The problem Mr Hammond faces is that he cannot raise significant sums unless he tackles some of the most generous tax concessions in the system. The capital gains tax exemption applying to people’s homes, and the array of tax and National Insurance reliefs attaching to pension contributions are certainly within this bracket.

Several bodies, including the influential National Institute of Economic and Social Research, have called for capital gains tax to be applied when primary residences are sold at a profit. Again, any such move would be unpopular across the electorate, and the UK’s housing market, particularly at the top end, is still adjusting to stamp duty changes.

On the pension front, change is more likely – but how quickly might it come? We believe that – in the longer term, at least – significant reform of pension reliefs is inevitable. Commentators on all sides of the political spectrum now agree that the benefits fall too heavily in favour of a high-earning minority. A move to align tax relief to a single rate (which would disadvantage high earners paying top marginal income tax rates) is gaining ground. But implementing this change would take time, and so wouldn’t solve Mr Hammond’s immediate need.

That leaves him contemplating a raft of smaller, more peripheral moves, of the sort we’ve become used to in recent years: the limiting of tax relief to higher earners, for instance, and the reduction of annual and lifetime allowances. 

Taking action: capital gains and pensions 

What action – if any – should you take? We do not plan on the basis of speculation, but there are certain areas where it may be worthwhile to discuss your options, in order to take advantage of the current landscape in case the future does bring change. 

One is capital gains tax. As my colleague Jonathan Brownlow has written here in the past, capital gains tax rates on non-property assets are currently at historic lows – which presents something of an opportunity. Many clients are holding assets that would trigger a tax liability if sold. There are many factors at play in such decisions, but with capital gains tax rates as low today as they can reasonably be expected to go, could crystallising those gains now be appropriate in order to free up the capital for other uses, such as estate planning?

As we have said before, the current pension regime offers attractive incentives for those still contributing, as well as IHT planning opportunities in some circumstances. In line with our general view that the pension tax regime will over time continue to become less favourable to higher-earners, we’d suggest that for many people it remains a priority.

Click here to read more on whether earners will face further cuts to pensions tax relief in the 2018 Budget.

Author

James Gladstone

James Gladstone

Head of Wealth Planning

James joined in 2012 and is Head of Wealth Planning. James is responsible for advising some of our largest clients on broad wealth planning issues including retirement and estate planning, investment structuring and wealth protection. He is also responsible for the Wealth Planning business within Cazenove Capital. Previously he was Head of Financial Planning at UBS and Financial Planning Director at Rathbones. James has over 18 years’ experience and is a Chartered Financial Planner.

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