Tax, tax and more tax

Date: 15 Feb 2021

Bumblebee Design

Ahead of UK chancellor Rishi Sunak’s March Budget, the rumour mill is once again in overdrive as to whether tax reliefs will be in the firing line and if so, which ones. As speculation picks up, Citywealth’s April French Furnell spoke to the private client tax community to get the lowdown.

It is lockdown 3.0 in England and public spending for the coronavirus pandemic is mounting; “this unprecedented government spending will have to be recouped somehow and tax changes and rises will be inevitable”, declares Paul Fairbairn, Partner at Cripps Pemberton Greenish. It’s this belief which is fueling speculation of tax changes affecting the wealthy, because as Paul explains, “those with the most will be asked to contribute the most”.

Yet at present, “no tax changes have been announced or even leaked”, he clarifies. Although that hasn’t stopped the rumour mill from circulating or indeed clients from acting.

“It’s a hot topic of conversation with clients” says Nick Toubkin, senior client director at Strabens Hall. “They want to consider what may happen in the forthcoming budget, but the issue is not knowing what changes are going to be made which makes it difficult to plan with any degree of certainty”.

“There is a risk attached to taking action”, explains Rakesh Dabasia, a Director in Buzzacott’s Private Client team. “Take for example, the concern over capital gains tax rates increasing to be in line with income tax rates. We are seeing many transactions being pushed through as some rush to complete before the Budget announcement on 3rd March. But what if the Capital Gains Tax rates don’t change and instead Rishi Sunak just says: ‘thanks for the extra tax’ on the capital gains realised”.

It’s a real risk. As Paul cautions, “It is always difficult to prepare for unknown change and normally unwise to trigger tax charges based on conjecture”.

That said, rumours always start somewhere, and CGT is at a historically low level. Capital Gains Tax (CGT) raises £10billion a year and last year the chancellor commissioned the Office of Tax Simplification to look at reforms. “With a CGT rate of 20 per cent versus an income tax rate of 45%, there is a blurring at the edges where people recategorize wealth as ‘capital’ rather than ‘income’. The review has been looking into ways of stopping people abusing this distinction, and one easy way would be to have no differential rates”, explains Elizabeth Small, a corporate tax partner at Forsters. The first report was published in September 2020, and the second was expected in early 2021 but has been delayed and is now not expected until after the 3 March budget.

“CGT is the one which clients are most concerned with”, states Susan Glenholme, managing partner and head of private wealth at Debenhams Ottaway. One of the spoken-of changes is a significant tax increase for those inheriting property as they might have to pay capital gains tax on the increase in value from the date of purchase to the date of sale, if the existing CGT uplift on death is abolished. For properties bought for mere thousands, which are now worth millions, this represents a huge concern. As a result, Susan explains that clients are concerned with planning, and looking at ways of passing property on to the next generation. She cautions, “clients must take the correct advice and need their financial planners, accountants and lawyers on board to all talk to each other to achieve the best outcome”.

Talks of a wealth tax are more “nebulous” describes Elizabeth. The publication of the Wealth Tax Commission report concluded that “an annual wealth tax is a non-starter in the UK and we should fix our existing taxes on wealth instead. However, a one-off wealth tax could work and would raise one-quarter of a trillion pounds over five years”. Elizabeth was more sceptical.

“Although concerns have been voiced by some about a Wealth Tax, for the time being I believe these are unfounded. The current Government has made it very clear that they are not in favour of such a tax”, says Paul. “In a post-Brexit world the government is unlikely to want to alienate those who contribute so much to the economy but also have the means to remove themselves from it”, added Paul.

It’s a sentiment shared by Rakesh, “We need to make sure the UK is competitive. Every country is going to have a tax grab – to pay for their covid measures. Rishi Sunak doesn’t want to hurt the British economy just as it’s starting to get off the ground again. We need entrepreneurs to be productive and generate wealth for the country. It’s a fine balancing act”. There is a lot of competition worldwide for UHNWs, such as the Italian regime which has proven popular with non-doms in recent years, says Rakesh.

Stefano Simontacchi, President of Italian law firm BonelliErede and member of the Private Clients Focus Team, provides an insight on the Italian regime: “while no-one can obviously predict if or when new tax measures will be introduced to face the current economic crisis, Italy seems less inclined to increase the tax burden. And any increase should not affect the Italian flat tax regime, as it is based on the principle of full exemption of foreign sourced income and foreign assets. The same holds true for new residents if inheritance and gift tax rates were increased: their foreign assets are tax exempt for this purpose”.

It has proven so popular that the number of people opting for the regime quadrupled between 2017 and 2019, and Stefano feels confident that change is not on the horizon any time soon. “The reason for its success is that people, besides seeing how beneficial it can be and how less complicated it is to the regime of other countries, feel confident that it is here to stay. Brexit, especially the degree of uncertainty that still surrounds it, has certainly boosted the appeal of Italy’s tax regime.”

So, what should UHNWs be doing now?

“Firstly, use allowances that are available such as ISAs, pension contributions – all the things they should be doing anyway”, says Nick. “It’s generally good to have a diverse range of holding structures for wealth to spread risk. Avoid a reliance on one structure which might be adversely impacted by tax structures”.

For those who purchased a second home during the past year, they might want to explore the shared home exemption, says Julia Cox, a personal tax and trust partner at Charles Russell Speechlys. “This exemption allows individuals to gift a share in a property (including a second home) to one or more individuals (for example, their adult children) without making a gift with reservation of benefit”, she explains There are specific conditions which must be satisfied for the exemption, so taking advice is key.

Some families might choose to bring forward their existing plans of wealth transfer or sale. Katharine Arthur, partner and Head of Private Client at accountancy firm haysmacintyre, says: “We’re working with clients who are bringing forward plans that they were already going to do, such as passing on assets to family or putting them into trusts, perhaps retiring and winding up their businesses. If they were going to do it anyway, they should not want to wait until the 3rd March to be certain of securing current CGT rates and reliefs”.

Elizabeth makes the distinction that: “What we’re seeing is not aggressive tax planning, this is sensible, precautionary action where families are choosing to ensure their assets are in the right place”.

“Ultimately, whether there will be adverse tax changes made right away on, say, a Budget day, and what those will be are matters of speculation and that always has to be emphasised to clients by practitioners. With the forthcoming Budget however, we know even if that does not bring tax rises overnight, those are surely coming at some stage so it still feels like a useful, early deadline”, concludes Julia.

If you are looking for tax advice ahead of the budget, click on the advisors’ names to visit their Leaders List profile. Find out more about their specialisms and client and peer reviews.