With the Budget set for 26 November, August has proved to be a bumper month for kite flying in the Treasury. At times it seemed as if every day there was a new proposal in the press as to what taxes could be increased to fill the £20bn+ black hole currently at the heart of British finances, without overtly at least causing the Chancellor to act counter to her manifesto promises not to increase VAT, income tax or national insurance (on working people only!).
One thing for sure is that the rumour mill is, and will continue to be, in full swing. It is impossible to know exactly what changes are coming (and there is a strong argument that nothing that has been floated so far is capable of filling the required gap) but we have considered the rumours below and set out what action you might consider ahead of the Budget.
Lifetime Gifting
Long term residents of the UK (i.e. those who have been UK resident for 10 out of the last 20 tax years) are subject to inheritance tax ('IHT') on their worldwide assets. Generally, if a long term resident makes a gift above £3,000, the value of the gift remains within their estate unless they survive for seven years from the date of gift. If the individual dies within the seven years, the value of the gift may be subject to IHT at 40% with the rate of tax reducing to 32% after three years and an 8% reduction for each year thereafter.
It has been suggested that the Government may:
1. increase the seven-year term to ten years; and/or
2. introduce a lifetime gifting amount, any gifts above this value would be subject to an immediate charge to IHT, similar to the US gifting regime.
Whilst the lifetime gifting cap is not something we expect, the increased gifting term is conceivable. When a long term resident becomes non-UK resident, they will remain within the UK IHT net for up to ten tax years (this is known as an IHT 'tail'), therefore it seems likely that the Government would increase the gifting term to align it with the IHT tail. However, this would likely be very unpopular indeed with vast swathes of Middle England and would also not generate very much revenue in the short to medium term so there is a big question as to whether any such changes would be worthwhile for the Chancellor.
If you are considering making lifetime gifts to reduce your IHT exposure, we would recommend making these gifts as soon as possible, taking into account the potential capital gains tax ('CGT') implications. There is potential structuring available where the intended recipients of a gift are still young and where there is a concern about control (for example family limited partnerships or family investment companies) and this is something that we would be happy to discuss further with you.
Exit Tax
An exit tax is a form of CGT levied on individuals permanently leaving a country or relinquishing their citizenship. The individual is treated as having disposed of their assets at market value and is subject to CGT on any gain. Clearly, an exit tax is often implemented in order to disincentivise individuals from leaving a country. A number of countries already levy some form such an exit tax, including Canada, the US and Germany.
Given the large number of reported departures from the UK this year, it has been suggested that the Government may introduce an exit tax on individuals who become non-UK resident.
As companies and trusts that emigrate from the UK are subject to an exit tax, from a certain perspective it would come as no great surprise if an exit tax was introduced for individuals, though it is fraught with difficulties. Implementing an exit tax on those leaving the country would in many ways be a one off tax grab on those already here and will likely discourage wealthy individuals from relocating to the UK in the first place in the future. Such a discouraging approach is counterintuitive to the Government's aim of attracting high net worth individuals, an aim that would be better served by reducing their tax burden rather than keeping them prisoner with the threat of an exit tax looming. Many of the other countries which have some form of exit taxation also have some form of rebasing of foreign assets on individuals arriving in the UK so that it is only the gains which accrue while an individual is resident in the UK which are taxed and it would be likely that this would be a necessary counterpoint to any tax.
For those concerned about such an exit tax, now is a good time to consider the assets that are held and what their current base cost is, and what opportunities there are for rebasing now.
Wealth Tax
Unlike some other European countries, the UK does not impose a wealth tax on the country's wealthiest individuals. However, in recent years there have been suggestions that some form of wealth tax may play a significant role in the reversal of the UK's fiscal deficit – including former Labour leader Neil Kinnock proposing a 2% tax on assets valued at over £10 million.
It has been suggested that the Government may introduce an annual charge on asset values exceeding an undetermined threshold. If you were to believe some of what you read, this could be the sole tax change needed and it would generate more than enough funds to fill the hole.
To date there has not been much, if any, support for a wealth tax from those in the Government and the calls for its introduction have very much been from external commentators. Although wealth taxes have been introduced in a number of other jurisdictions previously, most have then subsequently abandoned them and there is a whole litany of reasons why they are ineffective.
We consider it very unlikely that a wealth tax would be introduced, not least because it would trigger a further exit of wealth creators and discourage people from coming to the UK in the first place.
Mansion Tax
The default asset to go to when a Chancellor is looking to raise revenue has traditionally been residential property and there is nothing to suggest that this time will be any different. When a UK resident disposes of an asset, they are subject to CGT on any gain in value at a rate of 24%. However, generally speaking, when an individual disposes of their only or primary residence, the CGT liability is relieved entirely by applying the principal private residence ('PPR') relief.
It is rumoured that Rachel Reeves may bring an end to the relief for 'high value properties' – which is said to be properties valued at greater than £1.5m. Given the ever-increasing property values, this change would certainly not be limited to 'mansions' and many owners of terraced houses in London could find themselves on or around the threshold.
PPR relief is a very generous tax relief so it is not beyond the realms that it would be amended in some respect to raise additional revenue. However, a £1.5m limit would likely prove widely unpopular and given the poor reaction to the recent tax changes, if a limit was brought into force, we expect it to be higher than £1.5m.
If you are considering a sale of your property, you may consider expediting a sale or gifting the property before the Budget so as to bank the PPR relief – you would need to consider the IHT implications of such a gift.
Capital Gains Tax
Invariably there will also be (the annual) speculation as to whether the rate of CGT will be increased more generally (potentially to bring it in line with income tax rates). When it comes to CGT, speculation is often more lucrative for the Government than actual rate increases (as it prompts people to take action before a Budget) and there is a real question as to whether such an increase in rates would generate anything like the revenue that is suggested. However, what is clear is that if you are planning a disposal of assets in the near future, it would be advisable to do so before the Budget so that you can be certain as to the rate that will apply.
Stamp Duty Land Tax
Stamp duty land tax ('SDLT') is levied on the purchaser of real estate in the UK. SDLT is charged at a progressive rate based on the value of the property, the rate will also increase if the purchaser is non-UK resident and/or the purchaser owns other property.
The Government is apparently considering abolishing SDLT entirely and replacing it with a national property tax which would be levied on the seller, not buyer, on the sale of their property. For many this would be a welcome change given the tax savings, and it's likely that advisers would be open to this change given the unnecessary complexity of the SDLT regime. That being said, it is unlikely that the Government would scrap the SDLT regime in the Autumn, it is more likely that we would see a phase out of the regime to give the Government time to create an alternative. Such a policy would likely be viewed very negatively by house owners who have already paid a substantial amount of SDLT on the purchase of their house and could potentially then be hit by a further charge on selling the same property, especially if they are then downsizing. There is therefore a real risk that if not done carefully, the introduction of such a change could really slow down the housing market, so definitely not an easy win for the Chancellor.
Unfortunately, this is a case of 'wait and see' but buyers may be tempted to delay potential purchases until November to see if they might save on SDLT.
Rental income
In the UK, landlords are subject to income tax at their applicable rate up to 45%. However, the Government are apparently considering subjecting the rental income to national insurance – an increase in income tax by any other name is still an increase in income tax.
Whilst many landlords are operating at very tight margins, they seem to be a target for the Government and media so it would come as no great surprise if they were to suffer an increased rate. Landlords may consider gifting the property to a family member with a lower rate of income tax in order to reduce the tax burden.
Conclusions
With so many rumours, it is very difficult to say which changes could be introduced though the one thing that is certain is that there will have to be tax rises in the Autumn Budget. If you are considering making sales or transfers of assets then there is clearly an advantage in doing so before the Budget and you should consult your usual Withers contact. For those without clear plans but who are concerned, a good idea is to assess what you have and how such assets could be impacted by any of the changes above, meaning that you could be in a good position to take action closer to the Budget if it seems like any of these changes will come through.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
