Proposed tax hikes to pay for Covid19
Written by Ray Coman
Over the weekend, Rishi Sunak has leaked plans for sweeping tax hikes to two British newspapers, the Telegraph and The Sunday Times. This is in part a response to the consultation on capital gains tax earlier in the Summer. The proposals are required to plug a hole in British finances estimated to be between 20bn and 30bn left by coronavirus.
The sharp 5% rise in corporation tax to 24% will bring it back to a level not seen since 2012. Historically, a “Small Rate Profit Limit” which from 1994 to 2015 was set at £300,000 created two tiers of tax rate based on profits with a gradual increase in rate from the small rate to the full rate.
The hope is that any rises in corporation tax will mirror this historical system of corporation tax. A blanket rise in the rate would result in a strong tax justification for operation as an unincorporated business rather than a company. This is because there is little tax difference between the two structures as it stands. The resultant disruption of disincorporation will be unwelcomed for small businesses and contractors, many of whom are trying to get back up and running after lockdown.
The other proposal was an increase in capital gains tax. The leaked report targets owners of residential property which is not exempted by principal private residence relief. This will mainly be landlords and owners of secondary property. A reduction in supply of rental property could bring about rises in rent at a time when the unemployment impact of lockdown is most sharply experienced - by the least well off.
The idea is to make gains taxable at the same marginal rate as income. This was broadly the system of tax in the UK from 1988 to 5 April 2008.
The final proposal, which affects tax relief on private pension contributions is possibly the least prudent. The consequences of disincentivising pension saving could be to increase the dependence of an ageing population upon the state.
A competitive advantage gained in the UK through less severe fiscal measures should be considered by the Revenue as an alternative strategy for debt reduction.
Likely the proposal will be effective from 6 April 2021 and so there is still time to increase pension contributions prior to that date.
For landlords and other property owners contemplating a sale, the following months could be opportune while demand is supported by a stamp duty holiday.
Death creates a capital gains tax free uplift in value, and a further possibility is to retain property exposed to capital gains tax and consider Trust planning for the avoidance of tax.
For contractors and other small business owners it is too soon to recommend moving the business out of a company. The announcement will almost certainly come in the Autumn Budget and there will probably be time to prepare arrangements ahead of the introduction of any new rules. It is likely that- in the current climate- the Treasury will seek to deaden the impact of any shock measures.