The UK budget and tax rises: restructure now?

The end of 2020 is approaching fast. Like governments all over the world, the UK government has to find a way to start to fill the hole in the economy arising from the COVID-19 crisis. The spring budget is due in March 2021, and it seems inevitable that this will include some tax rises, and perhaps some entirely new taxes. In this article we focus on tax rises which are most likely to be of interest to advisers and fiduciary service providers in the Channel Islands, and their clients.

Changes already announced

There are some changes which have been introduced already, and others which have been announced. The corporation tax rate, which was supposed to go down from 19% to 17% on 1 April 2020, stayed at 19%.

The threshold for stamp duty land tax (SDLT) is set to return to its usual £125,000 level, and on top of this will be the new non-resident surcharge for SDLT. This is an additional 2% surcharge for ‘non-resident’ purchasers, which will apply to residential land transactions completing on or after 1 April 2021. This means that the top rate of SDLT, if the additional 3% rate is also chargeable in relation to purchasers of second homes, will be a breath-taking 17%.

The surcharge applies to individuals, companies, trusts and partnerships. The rationale is to make housing more affordable for UK residents and to raise revenue to tackle rough sleeping. Very reasonable aims, particularly in the current economic climate, but a trap lies in the detail.

The trap concerns the definition of ‘non-resident’ for the purposes of the surcharge. The usual tests for residence do not apply – the legislation introducing the surcharge also has its own tests of residence. Accordingly, it is possible to be taxed as a UK resident for most purposes, but to be ‘non-resident’ for the purposes of the surcharge and therefore to have to pay the additional 2% as well.

The tests for company residence for the purposes of the surcharge are similar but not identical to those which apply for most UK tax purposes, so the position would need to be checked. Trusts also have their own test for residence. If a beneficiary has an interest in possession in the purchased property, the beneficiary is assessed as the purchaser. The situation is the same for a bare trust. For a discretionary trust the rules are complex but essentially the residence status is determined by reference to the trustee.

What taxes might rise and which might be introduced?

Corporation tax

Any fiduciary service providers in the Channel Islands holding income producing assets or real estate in the UK through companies may be concerned about a rise in corporation tax. As noted above the planned reduction to 17% in 2020 did not happen, and Chancellor Rishi Sunak is reported to have been considering increasing the rate to 24%. This rate is the global average, and many other European countries have a higher rate. It is estimated that this would generate £12 billion in the 2021 / 2022 tax year, rising to £17 billion in 2023 / 2024.

This idea has been challenged by economists and business leaders as being likely to stifle recovery. With so many businesses having already been savaged by the COVID-19 measures, and with the uncertainties of Brexit also on the horizon, Mr Sunak may be reluctant to raise corporation tax by this much. A small rise, however, would not be a surprise.

Capital gains tax (CGT)

One thing most commentators seem to agree on is that a rise in the rate of CGT is very likely. CGT is charged on chargeable gains made by individuals and UK resident trusts. Non-UK resident individuals and trusts also pay CGT on gains made on disposals of real estate in the UK, or on the disposal of shares in ‘property rich’ companies, deriving 75% or more of their value from UK real estate. Non-UK resident trusts do not pay CGT on other gains, though these gains can give rise to CGT in the hands of UK resident settlers and beneficiaries, or those who become so, in certain circumstances.

The rates of CGT are currently 10% (or 18% on residential property) for basic rate taxpayers and 20% (28% on residential property) for higher rate taxpayers. These rates are low compared to those on earned income, much of which is taxed at 40% or even 45%, and the discrepancy has been challenged. The Office of Tax Simplification has been working on identifying ways in which CGT may be simplified, and the first stage of this review, on the principles underpinning the tax, was published in November 2020. One of the recommendations it makes is for the government to consider more closely aligning CGT rates with income tax rates. If the government does this, the report recommends considering a reintroduction of relief for gains which are simply due to inflation (currently inflationary gains are taxed to CGT in the same way as actual gains).

In practice, although a rise in CGT seems likely, the tax effectively remains voluntary in many circumstances. Individuals, trustees and companies can simply consider holding onto assets rather than disposing of them.

A wealth tax?

In July, the Institute of Fiscal Studies announced what has been referred to as a ‘wealth tax’ project to bring together evidence on the idea of a tax on assets, or certain assets. The Wealth Tax Commission report was published on 9 December, recommending that if the government is seeking to raise tax revenue it considers a one-off ‘Covid Recovery Tax’. The commission did not recommend an annual wealth tax.

The recommendation was that ‘wealth tax resident’ individuals would be subject to the tax on net worldwide assets above a certain threshold. Non-wealth tax resident individuals would be liable to the tax on UK real estate (net of any lending taken out to finance its purchase) and perhaps certain other assets. Trusts with certain UK connections would also potentially need to pay the tax. We will be publishing a more detailed blog post on the proposals within the next few days.

Time to restructure?

Given the need to raise revenues it seems tax rises in the short and medium term are inevitable. Advisers considering restructuring might wish to take advantage of the current lighter tax rates, coupled with relatively low asset values, and do so prior to March next year.