Another Year, Another UK Budget

AAM Advisory Another Year, Another UK Budget

Back in November 2016, the then relatively new Chancellor announced an end to Spring Budgets after the one due in March 2017. A new cycle is now in place, with March 2018 having seen Mr. Hammond present a relatively brief Spring Statement. Whereas his predecessors had often turned the Autumn Statement into a second unofficial Budget, Mr. Hammond is aiming for major tax changes to be announced only once every 12 months, well ahead of the start of the tax year.

It is rumoured that the next Budget could come as early as October.

So, what can we expect…?

The ‘knowns’

In July, the Treasury published Finance Bill 2019 draft clauses for consultation. These contained nothing of any great surprise but, subject to any late amendments, confirmed the following changes:

Capital gains tax on residential property – This is yet another piece of legislation aimed at the buy-to-let investor – or perhaps that should be disinvestor. From 2020/21, for UK residents the payment date for capital gains tax (CGT) on residential property profits will change to within 30 days of the sale date. The change could make next tax year a busy one for sales of existing buy-to-let property, as ‘amateur’ landlords quit the market, with the potential to push down property prices.

Offshore time limits – For income tax, CGT and inheritance tax, the assessment time limit for non-deliberate offshore compliance failures will be extended to 12 years from the current 4 years or 6 years, depending upon the nature of the error. The reform will effectively be retrospective, e.g. for income tax and CGT errors resulting from carelessness, the first tax year affected will be 2013/14. For deliberate errors, the assessment time limit remains at 20 years.

This change comes after the end of HMRC’s “Requirement to Correct” (RTC) initiative for undeclared offshore tax liabilities, the deadline for which is 30 September 2018. RTC will be followed by a new and tougher Failure to Correct (FTC) system, with a penalty starting point of 200% of the tax liability.

The ‘known unknowns’

The Budget will provide details of the new income tax bands and allowances for 2019/20. The Key point to watch here is that the last Conservative manifesto set a target for a personal allowance of £12,500 and a higher rate threshold (ex-Scotland) of £50,000 for 2020/21. At present these are £11,850 and £46,350, implying the Chancellor will need to give the higher rate threshold a bigger upward nudge than the personal allowance.

The ‘unknowns’

Although the move to an Autumn Budget is meant to reinforce a consultative approach to tax legislation, it does not mean Budget surprises have become a thing of the past.

There are two areas where such a scenario could play out:

Inheritance tax – In January of this year, the Chancellor asked the Office of Tax Simplification (OTS) to review inheritance tax (IHT). He wanted the OTS “to ensure that the system is fit for purpose” and to look at “whether the current framework causes any distortions to taxpayers’ decisions surrounding transfers, investments and other relevant transactions”.   As the basic structure and much of the legislation for IHT dates back to 1984, there is almost certainly scope for the OTS to propose some changes.

References to “distortions to taxpayers’ decisions” could point to changes being made to business relief.

Currently, shareholdings which qualify for business relief are generally exempt from IHT after two years of ownership, with spouses and civil partners able to link ownership periods for transfers between them made on death.

In recent years there has been a growth in the use of “IHT portfolios” built around AIM and unlisted shares which qualify for business relief.

It is arguable that distortions are emerging here. Were the Chancellor to decide to revamp business relief, he would almost certainly take immediate action or risk creating a buy-now-while-stocks-last period until next year’s Finance Act becomes law.

A similar instant cut-off could occur were there revisions made to the lifetime gift rules, which are highly generous, if you have the available funds:

  • Currently outright capital gifts escape IHT, regardless of their size, if you survive seven years after making them (and may benefit from reduced tax after just three years).
  • Under today’s “normal expenditure” rules, regular gifts out of income are immediately IHT-free, provided they do not reduce your standard of living.

Pensions – The current decade has seen cuts to both the annual allowance (limiting tax-efficient contributions) and the lifetime allowance (limiting the size of tax-efficient accumulated funds). However, the elephant in the room – the rate of tax relief on contributions – has been ignored and may well receive attention in the coming Budget.

The result of the rumoured flat rate tax relief would be an extra £4bn for the Exchequer and most pension contributors receiving more tax relief – a tempting combination for any politician.

Further support for a flat rate approach subsequently emerged from the influential House of Commons Treasury Select Committee, which suggested the Government should consider:

  • Replacing the lifetime allowance with a lower annual allowance; and
  • Introducing a flat rate of relief.

Action

The measures and non-measures outlined above are by no means the full list. However, they should serve as a reminder that the burden of tax is likely to become heavier. The Chancellor has extra money (£20.5bn a year by 2023/24) to find for the NHS following the Prime Minister’s Summer pledge. Even though the latest Government borrowing figures suggest he has some wriggle room, he is not going to be in tax-cutting mode this Autumn.

Contact your AAM Financial Planner or email  [email protected] today to arrange for a pre-Budget planning review, particularly if potential changes to pensions or IHT are a concern to you. As both areas are complex, the sooner you contact us the better.

Source:
www.techlink.co.uk

Ian Black
Head of Financial Planning & Wealth Solutions
AAM Advisory

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