The budget unveiled by Chancellor Rishi Sunak on March 3rd was unusual in many ways, coming as it did in the midst of a global pandemic which brought the vast majority of the economy grinding to a halt and saw government borrowing rise to £270 billion by January 2021.
Against this backdrop there was speculation how the chancellor would begin the process of rebalancing the books, given raising Income Tax directly was ruled out by commitments in the last Conservative Party manifesto.
There was also a reluctance to increase the tax burden at a time of economic contraction and the same reluctance applied to introducing large-scale and highly visible cuts to public spending – no plans for another round of austerity.
Changes to Inheritance Tax (IHT) and Capital Gains Tax (CGT) were expected, with speculation fuelled by Office of Tax Simplification (OTS) reports, including ‘OTS Capital Gains Tax Review: Simplifying by design’ which suggested that CGT should be set at the same rate as Income Tax.
In 2019, an OTS review of IHT suggested, amongst other things, that the 7-year period before a person’s death during which any gifts made are exempt from IHT should be reduced to 5 years, on the grounds of greater simplicity and the relatively low tax revenue delivered by this rule.
It is clear the chancellor is, at the very least, open to the possibility of reforming the way in which the tax system operates as well as simply tinkering with the rates of various individual taxes.
Budget delivers little change to tax regime
The difficult likely economic landscape of 2021 and beyond, meant caution was the watchword for the budget and that a ‘tax increase’ of sorts, was only introduced by the back door via the implementation of a freeze on income tax allowances, which is set to last for at least five years.
This is something which will amount to an increase in real terms as people receiving pay increases over the 5-year period find themselves earning more than the allowance.
With regard to IHT the current nil-rate bands will be maintained until at least April 2026. This means an individual will continue to have a tax free allowance of £325,000 – the nil-rate band, and if they are leaving property to a direct descendant, such as children or grandchildren, there is an additional allowance – the residence nil-rate band – which is currently set at £175,000.
Previously, this band had been set to rise in line with inflation in April 2021, but the budget froze this allowance until 2026. Even with the freeze, a married couple or civil partners can still combine their individual allowances to ultimately leave as much as £1 million, free from IHT.
The freeze continued with Capital Gains
A similar freeze was imposed on CGT, the tax charged on the profit realised when an individual sells something which has increased in value.
The level of tax payable is based upon the income level of the individual, so basic rate taxpayers pay 10% on the profits they make, which rises to 18% on sales of second properties, while higher and additional-rate taxpayers pay 20% and 28% on property.
In addition to these percentage rates, individuals have a CGT allowance, setting an amount they can earn before paying CGT. This is currently set at £12,300 for individuals and £6,150 for most trusts. At the budget these allowances were also frozen until 2026.
As was the case with the frozen personal tax allowances, freezing CGT and IHT allowances in this way was clearly the chancellor’s attempt to bring in more tax revenue without doing too much to dampen economic activity.
The gamble is that demand released in the economy by the ending of restrictions and the resumption of something approaching normality, will be sufficient to power a growth and investment-led recovery which isn’t held back by the slightly regressive nature of frozen allowances.
Despite the lack of substantial changes to the tax regime, it still pays to write or review your Will and plan for your future. Here at Ansons we can help, so please contact Luke Smyth, a Senior Associate Solicitor in the Wills, Probate & Trusts team on 01543 211955 or email firstname.lastname@example.org
If you would like to be kept up to date with Ansons news please follow us on Facebook, LinkedIn or Twitter