Things are not looking good for the person on the Clapham omnibus – house prices are almost in freefall in the Home Counties, the Governments ‘Help to Buy’ and higher Stamp Duty alongside the difficulty in obtaining a mortgage means youngsters can’t afford to buy and are being trapped in rented accommodation, fears over Brexit have stalled investment and could push the Country into recession, high paid jobs in the City are under threat, and the rise in interest rates has tightened many pockets, especially those with large interest only mortgages. People are eating out less and restaurant chains are under pressure. The tax attack on Buy-to-Let properties is having the desired affect and many are having to be sold. The Government is hopeful this policy will reduce first time buyer property by 20% and make the young vote conservative!! The decline in the High Street brought about by the rise in online shopping could have a major effect on investment funds which have traditionally been invested in shopping centres.
Philip Hammond announced that he will deliver his 2018 Autumn Budget on Monday 29th October 2018, and currently it is shaping up to be unlike anything we have seen before. This year the budget falls slightly earlier than usual because of the need to clarify tax, spending and other financial decisions before a final Brexit deal can be reached with the EU. The Budget will allow the chancellor to update the country on economic matters just 10 days after the next EU summit, but ahead of the suggested November deadline for agreeing a deal.
With now less than a month to go before the Budget is delivered, there are minimal indicators as to Mr Hammond’s plans, however he has given some slight hints.
Fuel Duty
Fuel duty will be frozen for the ninth year in a row, the Prime Minister has pledged, an announcement that will leave the Chancellor with a deep hole to fill in his October budget.
May announced the freeze at her Conservative party conference speech in Birmingham on Wednesday 3rd October. The Treasury had been considering a rise for the first time in eight years as part of a package of measures to help fund the £20bn-a-year increase in NHS spending announced earlier this year.
NHS Spending
A primary concern within the upcoming Budget will be finding the money to retain Theresa May’s promise to input a further £20bn into the NHS by 2023. It has been mentioned that this would require tax increases, however which taxes these will be we do not know. However, the government registered the largest budget surplus for the month of July in 18 years, leading to predictions that funding may be found without having to make savings elsewhere. If the chancellor decides higher taxes do need to be applied, his digital tax on businesses may be put in place.
Digital Tax
In his speech at the Tory conference, Mr Hammond said Britain will impose a new digital services tax with or without the cooperation of other countries. He stated, ‘The best way to tax international companies is through international agreements, but the time for talking is coming to an end and the stalling has to stop”. Mixed opinions of the digital tax have come to light in the Confederation of British Industry. Some have suggested that it is a sustainable way to address the tax balance and doesn’t damage the UK’s global competitive advantage. Others believe it is risky and say it could make the UK less competitive in the context of Brexit.
Possible changes to inheritance tax legislation in the UK
It is impossible to accurately predict what changes are likely, but having reviewed all the reports circulating within the tax profession, some reasonable ‘educated guesses’ can be made.
Here are 7 of the most obvious areas to watch out for:
- Increase the main nil rate band from the historical £325,000 level introduced in the 2009-10 tax year. Some increases have already been made, with the new additional nil rate main residence relief, but it has added an awful lot of extra (and unnecessary) complexity. Why not simply increase the main allowance and be done with it? A rise to a flat rate of £500,000 might be sensible.
- Increasing the lifetime gift timeframe. Currently if you transfer assets using the potentially exempt transfer rules as a lifetime gift (without reservation) and survive the transfer date by 7 years, the assets fall completely outside your estate for inheritance tax purposes. This applies regardless of how much the assets are worth. Given that gifting is typically the backbone of most inheritance tax planning strategies, the 7 year timeframe could easily be increased to, for instance, 10 years. This would have a significant impact on tax revenues without further complicating the legislation. It would also potentially be politically popular as it could be argued that only the very wealthy can really afford to make large lifetime gifts of major assets.
- Combining the different individual gift allowances into a single larger annual allowance – for instance it is currently possible to gift £3,000 a year which leaves your estate immediately, but also to make other contributions to living costs, weddings, birthdays and make charitable donations. Rather than have multiple categories, there could be a simpler flat rate similar to the existing capital gains tax allowance instead.
- Changes to business property relief (BPR) rules. Currently, if you own a family business, it is possible to transfer it to family members to inherit without paying inheritance tax through the BPR exemption rules. However, it is also possible to invest in AIM listed companies and provided the shares have been held for 2 years, also apply the BPR rules and benefit from zero IHT. Some argue this latter rule is less fair and BPR should include only family businesses and unquoted companies.
- Agricultural property relief may also be restricted and the tax relief available may no longer be so widespread.
- Pensions may be overhauled, to limit the tax-free transfer rules. Currently, holders of defined contribution pensions who die before the age of 75 are entitled to pass their pensions onto their heirs without paying any tax.
- Trusts may be further reviewed. These are already very complicated, and many people no longer consider trusts for inheritance tax planning because of the high costs of establishing and administering them, and the restrictions on the value of assets that can be passed to them tax free. However, there are many instances where a trust is beneficial to ensure assets are ring fenced and protected for a beneficiary. It is possible that a new type of trust might be introduced for these situations, with further restrictions added to the existing trust regimes in operation, making them even less tax efficient.
Entrepreneur’s relief
Philip Hammond has been urged to scrap billions of pounds in tax relief for entrepreneurs, labelled the “worst tax break” in Britain for helping just a few wealthy individuals, and use the proceeds to increase spending on the NHS.