The future for tax under the new coalition Government
What do we know about the likely tax policies of the UK’s new Conservative/Liberal Democrat Government? In this article, we look at the signals given so far in the coalition agreement and through the media, and what these mean for wealthy families, their trustees, and private banks. Taken as a whole, indications are that the main negative change is likely to be in Capital Gains Tax, with the impact of Income Tax and Inheritance Tax remaining broadly static for wealthy families in the next few years.
The new Chancellor, George Osborne, has committed to putting forward a new Budget within 50 days of the election, and much will become clearer at that point. However, the parties have already given some indications of tax issues on which they reached agreement while putting the seal on their coalition. Overall, the new Government’s likely tax policy reflects a blend of the two parties’ tax promises, but in the process of forming the coalition, some important tax pledges appear to have been sacrificed.
The Liberal Democrats’ commitment to raise the income tax threshold to £10,000 (from its current £6,475) is set to be introduced. This will be a two-stage process, with the next Budget containing a significant rise with effect from April 2011, and the full rise to £10,000 (in line with the Lib Dem manifesto) taking place in a later year. The pledge was that this would apply to all taxpayers. However, consistent with the approach adopted for the 50% tax rate, we assume that the rise in the income tax threshold will benefit lower earners first – so presumably it will not apply to anyone earning over £150,000, and for those earning over £100,000, the personal allowance will be gradually withdrawn.It is likely that the new 50% rate of income tax, introduced in April 2010, will be with us for some years to come. The Conservative party had indicated that they would wish to eradicate it within a few years, the general economy permitting, but its continuation may be necessary to pay for the increased personal allowance and other changes.
Capital Gains Tax
It is understood that the rate of CGT will be increased, as proposed in the Liberal Democrat manifesto. This is likely to lead to a return to the pre-2008 distinction between gains on business assets and gains on other assets (such as shares, property and so on). The current indication in the coalition agreement is that gains on non-business assets will be taxed (as they were pre-1998) as if they were the top slice of income, ie. potentially at up to 40% or 50%. It is not clear whether, as in those days, a form of indexation relief will be re-introduced.
It is not yet known whether business asset gains will continue to be taxed at 18% or at a new, higher rate. Furthermore, the former Chancellor, Alistair Darling, announced in his Budget in March 2010 that the Entrepreneurs’ Relief (under which the first £1m of gains on disposal of businesses is taxed at 10%) would be doubled to £2m – the new Government has committed to “generous exemptions for entrepreneurial business activities”, and we wait to hear what that means in practice.
It appears likely that the new rates of CGT will apply from April 2011, as it is usually seen as both difficult and unconventional to change tax rates mid-year. However, it remains possible that any change could be introduced with immediate effect after the Budget (expected in late June).
This is likely to bring into sharp focus the question of whether it is appropriate to “bank” gains at 18%, and to consider with fresh eyes the efficacy of products and wrappers aimed at securing CGT treatment on investments which might otherwise suffer income tax. Trustees of offshore trusts who are in a position to rebase, but have not already done so, should consider this carefully; those trustees holding stockpiled gains may wish to undertake a review of their likely distribution policy over the next 5 years, and consider distributing gains now at 18% (or 28.8% for old stockpiled gains with the maximum surcharge) rather than doing so in future years at a potentially much higher rate.
National Insurance contributions
Before the election, there was a good deal of debate about what critics called a “business tax”, that is, the planned further 1% increase in employers’ National Insurance contributions from April 2011. The coalition parties have apparently agreed that this rate increase should not take place, in line with a Conservative pledge to that effect. What is not yet clear is whether that freeze affects only salaries of £35,000 and below (as pledged) or a different group.
The Conservatives’ pledge to raise the Inheritance Tax threshold to £1m at some time during the life of the new Parliament has been abandoned. Accordingly, Inheritance Tax planning remains important. A key plank of the agreement between the coalition parties is that there will be fixed electoral terms of 5 years (barring a 55% majority of MPs voting for an early election). Although the nil-rate band may increase with inflation during this Parliament, we cannot expect to see a big rise in the IHT threshold before 2015, and then only if a Conservative Government was elected at that point.
A new wealth tax?
The Liberal Democrats had intended to introduce a 1% “mansion tax” levied annually on houses worth £2m or more. This plan has now been shelved.
The Liberal Democrats have long spoken out against the advantageous treatment of UK resident, non-UK domiciled individuals. Their manifesto contained suggestions that non-doms would be barred from claiming that status after they had been UK resident for 7 years, ie. the UK would adopt mandatory worldwide taxation of income and gains for all longer-term UK residents. This position is at an extreme from the Conservatives’ previously understood attitude to non-doms; it is not yet known if the parties have reached any understanding on this issue.
Vince Cable, the former Liberal Democrat Treasury Spokesman, has been handed the Business and Banking ministerial portfolio. His party had pledged to consider breaking up the banks, so that investment banking activities were separated from retail banking. A new commission is to be created, with a mandate from the new Government to focus on that issue and report within 12 months.
In the interim, as well as restrictions on bankers’ bonuses (yet to be announced in detail), it is understood that there will be a new “banking levy”, said to be intended to repay the money used to support the banking sector during the Global Financial Crisis. It is not clear if this will take the form of a new “Tobin Tax” on financial transactions, favoured by former Prime Minister Gordon Brown and other world leaders (but notably not the US, nor Bank of England Governor Mervyn King). Some argue that the UK already has such a charge, in the form of Stamp Duty Reserve Tax on sales of shares and other investments, although financial institutions are frequently exempted. Could that be expanded, or will we see an Obama-style tax on bank assets?
Other areas of tax policy
The main thing we can all look forward to is tax simplification. We are told that the new Government will review the tax system and look for ways to streamline it.
The coalition agreement indicates that Liberal Democrat proposals on tackling tax avoidance will be explored. One point is worth highlighting. The Lib Dems had suggested that Stamp Duty Land Tax rules should be tightened to ensure that properties owned via non-UK holding companies should not be free from tax if the company, rather than the property, is sold. This may be one area to watch.
Both parties pledged to restore the link between the state pension and earnings, and the coalition agreement confirms that, from April 2011, pensions will have minimum increases linked to earnings, retail prices or 2.5%, whichever is higher.
It is not yet clear what position the parties have agreed on pension contributions. While the Conservative manifesto indicated a wish to see businesses bolstering the pensions of employees, the Liberal Democrat manifesto suggested that all contributions to pensions would have tax relief capped at 20%. Again, due to the difficulty of changing tax horses mid-year, it is relatively unlikely that any cap or rule change would take effect during the current tax year 2010-11, so taxpayers affected by the 50% income tax rate should ensure they maximise the contributions which are tax relieved at 50% (£20,000; or £30,000 if regular annual contributions of that or a greater sum can be demonstrated).
The married couples’ allowance, a key Conservative promise, appears to have survived the negotiations, although the Liberal Democrats will abstain if the matter comes before Parliament. It is not yet clear what form the allowance will take, but it appears to be worth £150 per year to married couples or civil partners.
Other relevant policy issues
One more key point which is likely to affect both wealthy families and private banks is the proposed annual limit on non-EU immigration. This was a proposal in the Conservative manifesto and appears to have been agreed by both parties. The rules introducing the cap are likely to be announced in coming months.
If you would like to discuss any of the issues raised in this article or discuss possible planning strategies, please speak to your usual contact at MTG, or contact Arabella Murphy (partner).
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