Summary of the Budget and Tax Day Announcements for Private Clients
The 2021 Budget
Since the start of the Covid-19 Pandemic, the Chancellor has not shied away from making reactive policy announcements. The much anticipated Budget, delivered on 3 March, was, in many ways, less radical than feared. Among the announcements were:
Stamp Duty Land Tax holiday
The Stamp Duty holiday, due to end on 31 March, will now end on 30 June 2021 to avoid a cliff-edge for purchasers. Currently the 0% Stamp Duty threshold is £500,000. From 30 June, the threshold will reduce to £250,000 until the end of September, before returning back to the usual level of £125,000. This policy will only apply to England and Northern Ireland.
Freezing of Allowances:
As planned, the Personal Allowance will rise with inflation from April 2021 to £12,570. However, it will be frozen at this level until April 2026. Similarly, the higher rate threshold will rise to £50,270 from April 2021 and remain at this level over the same period.
While this is not a formal rise in Income Tax (a red line in the Conservative Party Manifesto), the effect is not too dissimilar. The Office for Budget Responsibility estimates that 1.3 million more people will pay Income Tax as a result and one million more will become higher rate taxpayers by 2026.
Contrary to speculation, there was no rise in Capital Gains Tax (CGT) rates. However, it was announced that the CGT annual exemption will also be frozen until 2026. It will be maintained at the present level of £12,300 for individuals and personal representatives, and £6,150 for most trusts.
The Inheritance Tax nil rate band and Residence Nil Rate Band are to be frozen at current levels (i.e., £325,000 and £175,000, respectively) until April 2026. By 2026, the Nil Rate Band will have been frozen for a total of 17 years (the last increase was in 2009). Admittedly, during this time, we have seen the introduction of the Residence Nil Rate Band, but this offers no relief for those without children or grandchildren.
Pensions lifetime allowances are also to be frozen until 2026.
Corporation Tax rises
Possibly the most significant Budget Day announcement was that of future rises to Corporation Tax. Whilst this does not directly affect individuals, it will be of note for all those with their own businesses. As from 1st April 2023, Corporation Tax will increase to 25%, other than for those companies with profits of up to £50,000 who will pay tax at 19%. A tapered rate will apply to profits up to £250,000. Additional relief is provided for loss-making businesses in the form of an extended three year carry back for up to £2 million of losses per group in each of the financial years 2020/21 and 2021/22.
Tax Policies and Consultation Day 2021
Perhaps almost as interesting as Budget Day, the Chancellor has added a new and important date to the fiscal calendar – Tax Policies and Consultation Day (Tax Day). On Tuesday 23 March, the Treasury announced and published more than 30 tax policy updates, calls for evidence and consultations. Much of this aims to pave the way for the Government’s 10-year tax administrative strategy but, as with the Budget, the announcements were felt to be less striking than expected, with no reference being made to the much talked about Wealth Tax.
There was a wide range of consultations announced – from carbon emissions tax to aviation tax reform. The following may be of particular relevance to private clients:
Reduction in Inheritance Tax Reporting Requirements
In welcome news, the Government published its policy to simplify the reporting requirements for Inheritance Tax. From 1 January 2022, over 90% of non-taxpaying estates each year will no longer have to complete Inheritance Tax forms for deaths when probate or confirmation is required.
The current temporary provision for those dealing with a trust or estate to provide an Inheritance Tax return without requiring physical signatures from all those involved will be made permanent.
These reforms attempt to solve problems that have come to the fore over the last year. However, there is still some ambiguity about reporting regulations in relation to estates where the deceased was never domiciled in the UK, but owned indirect interests in UK residential property. The Government hopes to publish an update soon.
Taxation of Trusts: Review
In 2018, the Government announced that it would hold a consultation on how to make trust taxation more transparent. The consultation received just over 100 responses, including from this firm, and a summary of responses to the review has now been published here. The Government found that the responses did not indicate a desire for comprehensive reform at this stage. This has been met with disappointment by some, particularly in relation to disabled persons trusts, which are subject to a complex tax regime that would benefit from simplification.
Income Tax Self-assessment
The Government intends to legislate later this year to extend ‘Making Tax Digital’ to income tax self-assessment from April 2023. Additionally, the Government is looking into the possibility of more frequent payments of tax (rather than the traditional once a year, or twice if you pay tax by payments on account) based on in-year information.
Clampdown on holiday lets
The criteria of what counts as a holiday let is set to be strengthened, to cut down on the number of people who pay cheaper business rates (as opposed to council tax), on properties that they claim to be holiday lets, but which are not actually rented out very often, if at all.
For specific advice on the impact of any of these changes, please contact a member of our Private Client team.