With the Budget coming up and with a new Chancellor at the helm, we have received plenty of queries about potential changes which this announcement could bring about. Rather than speculate on what may happen, however, we thought it would be useful to provide some insight into potential areas which have attracted the majority of attention. Accordingly, in this edition of View From The Bridge, we have put together a brief summary of some the topics which have been referenced in the financial press, in the lead up to the event.
Limitations of the Conservative Party Manifesto
It has been made clear by a number of market commentators that both the extent and scope of changes that could potentially be brought in by the 2020 Budget are subject to a number of constraints. The Government's promise, as part of the Conservative Party's Election Manifesto, to not increase Income Tax, National Insurance or VAT has the effect of limiting the number of options available to the Chancellor to increase overall tax receipts. As such, it has been noted that other alternative areas are likely to come under review, including but not limited to, potential changes to pension tax relief, entrepreneur's relief and inheritance tax ("IHT").
Changes to Pension Tax Relief
A key proposal under consideration is a reduction in pension tax relief. More specifically, targeting the 40% relief offered to higher earners. Under proposed new rules, high earners may only be able to avail themselves of a flat rate of 20%, the rate currently offered to basic rate tax payers. Common criticism of the current policy is that it provides insufficient incentives to basic rate taxpayers and disproportionately benefits individuals with higher income. The aim of any changes to the current status would be to create a more level playing field. Should such measures go ahead, it could be argued that there is the potential for investors to consider committing any income which no longer qualifies for tax relief towards other schemes designed to mitigate income tax, such as EIS or VCT products. However, we also acknowledge that, given the higher risk profile of these types of funds, the volume of unlocked capital to be deployed in such schemes may be subdued.
Entrepreneurs' Relief allows business owners to pay a lower rate of 10% capital gains tax on the sale of a business, instead of the usual 20%. Some believe that the relief is not properly targeted towards start-up companies and creates unfair advantages for business owners already sitting on large gains. In its defence, others have pointed out that the policy incentivises business owners and delivering any cuts will send a powerful signal to business about the entrepreneurial environment in the UK. The Conservative Party Manifesto made promises to the effect that the tax will be reviewed, with any change being likely comprised of a recalibration of the conditions under which the relief would apply, such that "start-up" companies, or companies operating in specific sectors, would be the principal beneficiaries of the policy.
Changes to Inheritance Tax
The recalibration of the current IHT regime has been mooted on many occasions and, more recently, a cross-party group of MPs has called for a reduction in the rate of IHT from 40% to 10%, unless an estate exceeds £2 million, in which case a 20% rate would apply. Many commentators have noted that they expect this to be the least likely scenario, primarily due to the extensive scope of its potential impact. A more likely scenario, however, is represented by the potential inclusion of assets which have not previously been subjected to inheritance tax, such as farmland. This represents a comparatively lighter touch scenario, although it will be dependent on the asset categories which could potentially be included. In any case, it is likely that tax-advantaged schemes will still prove attractive to investors due to the cumulative tax advantages presented by some of the products, specifically EIS, which targets Business Relief, Capital Gains Tax and Income Tax relief, as well as allowing investors to carry back their associated tax relief from the preceding year.
In closing, it is worth considering that, although Brexit is now expected to complete, its timing and the make-up of the UK's future relationship with the European Union remain unclear. Combined with the impact that the Covid-19 outbreak is having on global markets, there remains an element of uncertainty in the markets and the wider economy. As such, it could be argued that any drastic changes will be saved for the Autumn Budget. Nonetheless, we will be sure to report back once the Chancellor delivers the Budget, having taken the quintessential photo holding up the red box, and full details are available to dissect.
OTS proposals consider the possibility of reviewing the treatment of indirect non-controlling holdings and the required level of trading activity whether holdings qualify for Business Relief.