Budget 2020: Personal taxation

Expect changes in capital gains and inheritance tax

As the new government gets ready to deliver its first budget PETER YOUNG, partner and head of private client tax at Johnston Carmichael, shares his thoughts on the possible impact on our personal tax liabilities

Peter Young

In the run-up to the December election, the Conservative Party manifesto was light on tax detail, though there were promises of no increase in income tax, national insurance or VAT.

It pledged continued support for tax reliefs given through Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS).

The government also said there would be no changes in pensions tax relief although it is committed to finding a solution to the annual allowance charge that has affected people at senior level in the medical profession who are in defined benefit schemes.

In terms of capital taxes (i.e. capital gains tax and inheritance tax) there are a couple of things we might expect to see in the Budget.

A review of Entrepreneurs’ Relief (ER) is likely, given the criticism it has received from the Institute of Fiscal Studies, and others.  The question is whether the costs to the Exchequer of the low (10%) Capital Gains Tax rate is justified in terms of whether it stimulates entrepreneurial activity.

Qualifying gains up to a lifetime limit of £10m are available on qualifying disposals where, for other gains, a higher rate taxpayer would pay 20% or 28% on disposals of residential property and certain venture capital carried interest gains.

When ER was introduced in 2008 as a replacement to taper relief, it was limited to lifetime gains of £1m and this was gradually increased to £2m, £5m and then £10m. The conditions around qualifying disposals have been tightened in recent years and we may see further legislation to limit what qualifies, or perhaps a restriction in the gains qualifying for ER.

There have been few significant changes to inheritance tax (IHT) in recent years with many reliefs and exemptions remaining unchanged for years. A previous Conservative Government introduced the Residence Nil Rate Band (RNRB) which provides relief from IHT on death in relation to a person’s home passing under a will to a lineal descendent (children, grandchildren etc).

The RNRB is currently set at £150,000 and this is due to increase to £175,000 in April 2020.  When added to the existing NRB of £325,000, this means up to £500,000 of a person’s estate can pass tax free.  The RNRB is restricted and tapered where a person’s estate exceeds £2m. 

This seems set to stay and is seen as helping those in areas of high house prices, such as London, or those with valuable homes but limited other assets who have fallen into IHT simply because of the value of their homes.

Where we may see some significant change comes from proposals published by the Office of Tax Simplification (OTS) in the summer of 2019. The main proposals of the OTS report included:

Replacement of the various and sometimes confusing lifetime gift exemptions with one larger personal gifts allowance

Reform of the exemption for gifts made out of surplus income

Reform of lifetime gift rules with abolition of taper relief and reducing the number of years you are required to survive the gift from seven years to five years

Removal of the rebasing to market value at the date of death on assets which qualify for IHT business property/agricultural property relief.  This avoids the situation where a person dies, and the estate pays no IHT on an asset qualifying for Business Property Relief (BPR)/Agricultural Property Relief (APR) which the beneficiaries then receive with an uplift on the base cost of the asset for Capital Gains Tax (CGT) purposes to market value.  If they shortly thereafter dispose of the asset, then little or no CGT would be payable meaning assets passing hands with no IHT or CGT ultimately being paid. 

Contrast this with someone who gifts business property in their lifetime who would either pay CGT on the gift or hold over the gain, meaning that the person receiving the gift would pay CGT when they come to dispose of the asset.  The objective of the OTS proposal will be to level the playing field and promote more passing on of assets in lifetime, versus holding until death.

The OTS also recommends that furnished holiday letting businesses should qualify for BPR if they meet the 80/20 test. HMRC currently considers this to be an investment activity which would not qualify for BPR.

As well as the OTS’ proposals for reform of IHT, the All Party Parliamentary Group on Inheritance and Intergenerational Fairness has recently published a report advocating the abolition of IHT and the introduction of a flat rate death charge and lifetime charge on gifting in excess of £30,000 per annum.

We may find out on Wednesday the direction of travel on IHT. One thing is for sure, there will be change ultimately coming. 

Peter Young’s planning work currently centres around capital gains tax and inheritance tax mitigation for owner-managed businesses and private clients. He is highly experienced in advising on the tax affairs of small and large partnerships and works with owner-managed businesses, partnerships, trusts and high net worth individuals.

For further information about Johnston Carmichael visit https://johnstoncarmichael.com

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