100: Wealth tax / taxes to pay for COVID-19?

There is, as we know, a gaping hole in public finances: borrowing of £322 billion and a budget deficit of some £116 billion (and counting). Globally the picture is the same. The options are universal – increasing borrowing, decreased spending, increasing tax rates, introducing taxes.

The multi-billion pound question is which taxes will rise in the March Budget? The biggest earners for the Treasury are income tax, national insurance and VAT – in 2018 / 2019 these taxes produced £460 billion out of a total of £760 billion. But the 2019 conservative manifesto pledge not to raise the tax rates for any of these taxes makes raising them a politically difficult route. A freeze in the income tax thresholds, rather than raising them by the inflation rate, could raise billions but might be seen as breaking the spirit of the pledge.

What about corporation tax? In 2019 / 2020 this raised £56 billion. The reduction from 19% to 17% intended for April 2020 was deferred, and the suggestion that the tax might increase from 19% to 24% was challenged by business leaders and economists as being likely to stifle recovery. The Chancellor may be reluctant to raise it by much.

Inheritance tax (IHT) is a potential target. Reforms to certain exemptions and reliefs such as business property relief were mooted well before the pandemic. Although IHT raises only around £5.5 billion a year, it is estimated that the tax raised could be considerably more if these exemptions and reliefs were restricted.

Talk is circulating about the introduction of a wealth tax. The Institute of Fiscal Studies launched a project on this in July. The Wealth Tax Commission has studied whether a UK wealth tax is desirable and deliverable. The Commission published their evidence papers at the end of October and will be releasing their final report on 9 December 2020. We will cover their findings in a future blog post.

A major target could well be capital gains tax (CGT). The rates for this vary between 10% to 28% – much lower than the income tax rates of 20% to 45%. This disparity was challenged, long before the pandemic, as unfair and the government is carrying out a review of the tax.

In July 2020 the Office of Tax Simplification (OTS) was requested to carry out a review of CGT and aspects of the taxation of chargeable gains. The review is to identify ways in which CGT may be simplified and also to suggest how distortions of behaviour or policy intent can be reduced.

The review is to be published in two stages. The first, on the principles underpinning the tax, was published in November 2020. The second will follow in early 2021 and will explore key technical and administrative issues.

One of the OTS’s recommendations is that the government should consider more closely aligning CGT rates with income tax rates but if doing that should also consider a reintroduction of relief for gains which are simply due to inflation.

Although CGT raised only £9.5 billion in 2018 / 2019 perhaps it could raise a lot more, the OTS proposals are thought to be able to raise up to £14 billion. The government made gradual changes to bring the UK more into line with other jurisdictions (for example, the introduction of non-resident CGT on UK property disposals) but we still remain out of kilter with our generous main residence relief.

On the flip-side, the CGT net can be avoided simply by not selling or gifting assets – too much of a hike might therefore be counter-productive. On balance, though, given that tax rises may be inevitable, it seems likely that the rates of CGT will be a tempting target in March. Anyone considering gifting or restructuring may be wise to consider this in sufficient time to allow for action before the Budget, taking advantage of current generally relatively low asset values and benign rates of CGT.