Alex Docherty, a tax partner at accountancy firm Johnston Carmichael, looks at the importance of tax planning.
WHEN Rishi Sunak was named Chancellor in February, not even Mystic Meg could have predicted what the next 12 months would hold.
So far, 2020 has seen an extraordinary fiscal landscape develop as, in an attempt to deal with the devastating impact of the global coronavirus pandemic, spending rose to levels not seen outside war time. An accurate picture of just how much the crisis will cost the government won’t become clear for months yet, but the Office for Budget Responsibility (OBR) has confirmed that, since April and to the end of August, the deficit has already hit £174 billion. The Chancellor has asked the OBR to prepare economic and fiscal forecasts to be published later this month, which will provide greater clarity to the likely total scale of the deficit and the UK’s finances.
However, in a recent address to the virtual Tory party conference, the Chancellor was unequivocal: the books will have to be balanced. “We will protect the public finances,” he said, adding that “hard choices” must be made.
Undoubtedly, there will be a bit of a waiting game here. There are, however, some areas of the tax system that are already looking like prime targets and, for anyone who may be affected, it will be vital that they are prepared and have a clear plan in place for what may lie ahead.
One area that could be set for reform is capital gains tax (CGT). It’s a tax that has been in the crosshairs of legislators for a while now, so change here wouldn’t be particularly surprising.
Bringing CGT in line with income tax rates could be one option and would see the tax from profit on asset sales more than double, from as low as 20% on all but residential property to as high as 45%. Others point to something around a 30% rate, to take account of the fact that no relief is given for the inflationary increase of assets held.
The CGT uplift on death is another area where changes could be made. Currently the value of assets for CGT purposes are uplifted to market value at death. This uplift to market value applies on the basis that the asset has already been subject to inheritance tax (IHT). Of course, often IHT reliefs may be at play with no IHT ultimately payable, yet the asset is uplifted to market value for CGT, which can free beneficiaries up to sell the asset post death with limited or no CGT liability. If the CGT uplift to market value at date of death disappears, we may see more assets being passed on in lifetime as opposed to holding until death.
With the CGT regime in the Treasury’s sights, those sitting with significant funds built up in their existing companies may feel the time is right to extract those funds by way of a members’ voluntary liquidation, for example, or by undertaking a transaction to bank current CGT rates of 10% or 20% as opposed to delaying decision making given tax rises are likely.
Planning is key though and if you weren’t seriously considering making fundamental changes to your asset base pre-covid then you shouldn’t rush to change your plans now. Change is in the pipeline but there is no telling how significant any tax reforms will be. All we do know is that there’s a big deficit to meet and the UK Government will be looking for the most effective means of plugging that gap.
Any tax structuring you are considering should always be looked at with a longer view lens ensuring, where possible, that you maintain flexibility to adapt your planning as necessary in future as the tax landscape could look very different again in 18 months’ time.
If you’re at all unsure about your next steps, a qualified tax adviser will be able to help you make this decision and, if you’re not in the right position to make changes, they’ll help you explore your longer-term options. While we don’t have a crystal ball, what we can say with certainty is that now is a good time to review your circumstances and make sure you are prepared.
For more information on Johnston Carmichael, please visit www.johnstoncarmichael.com