Opinion

COVID-19: How the Treasury could replenish its coffers post-pandemic with changes to taxation

Published: 20th July 2020
Area: For the individual

COVID-19: How the Treasury could replenish its coffers post-pandemic with changes to taxation

It’s fair to say that we’re living through and dealing with a crisis that is affecting every aspect of our lives at the moment. The government’s commitment to supporting businesses and individuals with the Coronavirus Job Retention Scheme, the broad package of business loans, the financial measures to support the self-employed and other injections of financial assistance is to be commended. However, what happens once the pandemic is over?

When the current lockdown is lifted, and we all try to pick up from where we left off and find our ‘new normal’, it’s very likely that this financial support, which has been so important to keeping business and individuals going through these few months and beyond, will have left the Treasury with a potentially huge budget deficit.

Much has been written about the effects this lockdown will have on economic performance and current forecasting by accountants, PwC estimates a deficit of 10-15% of GDP in 2020/21 and the hope is that this falls to 5-7% of GDP in 2021/22.  However, with this large deficit, how will the government find the funds it needs to get the economy back on track?

Tax rises are inevitable

There is no doubt at all that the government will look to raise taxation somehow, somewhere.

It is unlikely that income tax and VAT will be their first port of call as this smacks of taxing the less wealthy and those most in need at a time when people have been living under extremely stressful conditions.

Instead, the more obvious and palatable choice of capital taxation reforms would be perceived as a taxation of the wealthier in society.

It is also possible that any such reforms could be pushed through in an emergency budget with little or no notice and could leave many families without the tools to pass their estates on to the next generation efficiently.

What sorts of taxation could be affected?

The likely targets are inheritance tax and capital gains tax, potentially including the reduction or indeed, abolition of Business Property Relief and Agricultural Property Relief on assets gifted on death.

There is also the possibility that the Potentially Exempt Transfer seven-year clock will be removed or extended. Currently, this works on a sliding scale and comes into play when gifts of over £250 are made during a person’s lifetime. Should the individual die before seven years have passed since the gift was made, then a level of tax must be paid depending on how many years it has been. If this relief is removed, then the full amount of tax will always be payable.

Capital gains tax free uplift on the base value of assets at death might be another target. At present, a person who has inherited an asset only has to pay capital gains tax from its value when they receive it to when they sell it. Should the capital gains tax free uplift be removed, then the receiver would have to pay capital gains tax from when the deceased originally acquired the asset instead.

Deeds of variation post-death may also be removed or amended to neuter their tax planning element.

Any abolition or amendment of one or a combination of the above reliefs and measures could result in significantly higher taxes and a reduction in the options available, so it’s important that families think ahead and plan now. Read more about efficient personal tax planning.

How can I prepare?

There are other vehicles and options available, such as:

  • Utilising existing trusts or creating new settlements – By using the current nil rate band of £325,000, married couples and civil partners can set up tax-free family discretionary trusts of £650,000. This enables people to support the next generation without immediately having to give assets outright.
  • Gifting assets if possible - Any changes to taxes are unlikely to be retrospective, so making lifetime gifts now, should people be able to manage without the asset, could be wise.
  • Reviewing and redrawing wills to take account of these possibilities – Having a flexible will and a letter of wishes can ensure that assets are treated in the most tax efficient manner.

What is key though, is that action is taken now to enable families and individuals to have choice and make the best use of the options out there.

We’re here to help

If you’d like help and advice around personal tax or estate planning then we can support and guide you through the process. Contact us confidentially today by calling 0330 024 0333, or filling out our enquiry form, and a member of our private client law team will get in touch with you shortly.

The uncertainty of what’s to come as a result of the COVID-19 pandemic is understandably keeping many people awake at night. However, while the scope of what our future may look like is still evolving, one aspect that can be controlled is putting measures and provisions in place to plan for the future and protect the wealth of you and your family. Our guide to recovery and resilience highlights the opportunities currently out there for effective wealth planning that will make a real difference.

Our free legal helpline also offers bespoke guidance on a range of subjects, with a team of experts on hand for any queries relating to personal and family matters. Available from 10am-12pm Monday to Friday, call 0800 689 4064.

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