As Chancellor of the Exchequer Jeremy Hunt prepares to present his first full Budget on 15 March, there is the usual speculation about what could be announced.
Sian Steele, Head of Tax at the wealth management and professional services group Evelyn Partners, says that after the raft of measures in his Autumn Statement, it seems unlikely that he will present any major changes to the big personal and business taxes.
“Recent better news on the public finances probably rules out any further tax grabs, as that would surely sow discontent across the Conservative Party. Mr Hunt is also likely to avoid springing any tax surprises that need implementing in April.
“But with the next election due in under two years, time is running out for the current Government to bed in further changes to the tax system.
“As Chancellor, Rishi Sunak was keen to focus on tax reliefs, noting that there are over 1,000 tax reliefs and allowances in the tax system, which can be costly and complex to administrate, so we may still see some tinkering here. But we hope that would be consistent with the Government’s stated aim of making the tax system simpler, fairer and more efficient.”
Business Relief*, AIM shares and Inheritance Tax
Steele says: “There are a number of reliefs that interact, for example Business Relief on family company or AIM-listed shares means that no inheritance tax is payable on death, and there is also no capital gains tax payable. The shares could be inherited and immediately sold with no tax payable at all. This is an area that might strike some as overly generous and has been raised as something of an anomaly in the past.
“Business Relief effectively exempts certain ‘unquoted’ shares from IHT if they have been held for at least two years. AIM shares are considered to be unquoted for these purposes and therefore acquiring an AIM portfolio is for some an IHT mitigation strategy.
“Business Relief applies to many other sorts of companies, and like venture capital reliefs can be effective in supporting smaller scale companies, but AIM-listed companies are larger, more established and have other routes to capital. However, pulling this relief for AIM shares could have consequences for valuations on the AIM market.”
*Often referred to as Business Property Relief
EIS and VCT reliefs
Steele says: “These were granted a stay of execution last Autumn so it is hard to believe that they will be downgraded significantly – particularly as Labour have also committed to maintaining them.”
Investors’ Relief
Steele says: “Investors’ Relief is little understood and some regard it as overly generous, so could be targeted. It is designed for investors who are not actively involved in the business, so are not directors or employees. Whereas the lifetime allowance for entrepreneurs’ relief (now Business Asset Disposal Relief) was reduced from £10m to £1m, the lifetime allowance for investors’ relief has remained at £10m. It is hard to see why tax reliefs should be more generous for passive investors rather than those who have built up businesses themselves.”
What we would like to see in the Budget
Evelyn Partners has a number of specialists across its Private Client Tax Services team: here they outline what would be desirable measures in their respective areas.
Taxation of wealth – Tax Partner Chris Shepard
We would like to see one key change to the probate process. The requirement to pay inheritance tax before probate can be obtained can prove very tricky for some families, particularly those who are property rich but otherwise do not have significant cash. While HMRC does address this to a degree by offering an instalment option, a much better solution to ease the financial burden would be to allow probate to be granted before the payment of IHT is made.
Individuals often choose to organise their financial affairs while still of sound mind, knowing that this may change in the future. While the lasting power of attorney regime is one solution, we would prefer a trust-based alternative. This would allow such individuals to settle assets into a trust from which they could benefit, in the hands of trustees with whom an appropriate relationship had been built, while ensuring that a fair amount of IHT was paid.
Aligning rates of CGT with income tax has been floated on many occasions. While we are not supportive of this proposal, if CGT rates were to increase, we would much prefer to see a system where lower rates applied to long-term gains, with higher rates only applying to short-term gains.
Buy-to-let and landed estates – Tax Partner Aloysia Daros
High interest rates, combined with the restriction on tax relief against rental income for mortgage interest, will push up rents – so we are keen for the mortgage interest tax relief restriction to be reformed.
We would also like to see tax relief introduced to help support the increasingly stringent requirements for energy performance certificates on rental property. Sufficiently good ratings are a legal requirement for the continuation of a rental business, and we would like the rules on what can be claimed as an income expense to be relaxed.
The now-defunct Office of Tax Simplification recommended that the Government consider introducing a broader immediate income tax relief for all property costs, other than where work is clearly part of the capital cost of the building. The OTS noted that this would be simpler for landlords and HMRC to administer and would also support the Government’s objective in improving the environmental standards of rented property, by offering certainty of tax relief for those costs.
In the topical area of natural capital, we would like more clarity around the accounting and tax treatment of the stages of the transaction and also the inheritance tax position of the land. It would also be useful for landowners to be provided with further guidance regarding the ability of ‘stacking’, and whether there will be the ability to continue to farm the land sensitively.
R&D tax relief is currently only available to companies, and extending this relief to partnerships would really support the farming community who often trade through partnerships.
Entrepreneurs and their businesses – Tax Partner Toby Tallon
The UK tax regime has become less favourable to entrepreneurs in recent years, and we would like to see a focus in future on celebrating and supporting entrepreneurs. While the proposed longer-term extension to the venture capital schemes’ sunset clauses is a good start, this could go further with increases to the investment thresholds.
There have been significant restrictions to business asset disposal relief, formerly called entrepreneurs’ relief, in recent years and this tax relief should be extended to further support entrepreneurs and potentially be tied into rollover relief.
Entrepreneurs also suffer from an inconsistent income flow, so we would flex the rules around the annual pension contribution allowance to counter this.
The Chancellor should also ensure that HMRC is adequately resourced to run an efficient tax system, which would benefit all taxpayers and advisers, and would help to ensure that taxpayers are paying the right amount of tax.
International – Tax Partner Anita Millar-Neale
With speculation around what changes a Conservative Government may make to the non-domicile regime, or indeed what a future Labour Government would do, we would like to see clarity and certainty for non-doms.
For the UK’s domicile rules to be competitive in Europe, we would prefer not to see further tinkering with the system, increasing complexity and decreasing confidence. In the past, the UK has been an attractive destination on the basis of political and economic stability, both of which have faced recent challenges. Individuals moving to the UK often contribute a huge amount to the UK economy, through paying employment taxes, national insurance, property taxes including SDLT, as well as substantial amounts of VAT through spending. After a period of time in the UK, inevitably they also pay personal taxes in one form or another.
Other countries are working hard to attract people. The focus should therefore be on ensuring that the UK is more welcoming to internationally-mobile individuals, with a clear message that it is open for business to encourage inward investment.
