What will be in the next Budget? How can I protect myself from increased taxation?

The background: the options for the Chancellor

Basically, when money is tight, any Chancellor has only three options:

spend less;
borrow more; or
increase tax revenue.

We are already seeing cuts in spending, from the winter fuel payment to major infrastructure projects.  The state pension will probably stop increasing as fast as it has done recently.  Some in the Press forecast extreme measures.  That might not materialise but we can expect more cuts and, one can only hope, a ban on vanity projects.

Borrowing may gradually come down.  The government is committed to trying to achieve that.  Lower interest rates will help.

Increasing tax revenue does not always involve extreme increases in tax rates.  As an experienced economist, Rachel Reeves will know of the ‘Laffer Curve’.  This suggests, put very simply, that very high rates of tax can actually cause the total tax collected to fall.  At this practice we see this happening: people begin to spend more energy on keeping their tax low than on making money in the first place.  Some people decide to leave the country, taking their spending with them.  Nobody wins.  The trick is to increase the tax take, whilst not provoking people into changing their behaviour to avoid tax.

What else might the Chancellor consider?

VAT

The present level at which a business must register is very high, compared with that in other countries.  That registration threshold is being used in connection with Making Tax Digital (‘MTD’) under which businesses are, over the next few years, being forced into much more regular tax accounting than at present.  Soon, the MTD threshold will be brought lower.  There is nothing to stop the Chancellor from using that administrative arrangement as an occasion to reduce the VAT registration threshold, bringing many small businesses into VAT and raising significant tax as a result.

Gift Aid

At present, relief is given at the higher rates of tax.  Rather like the proposal affecting pension contributions, relief might be restricted to basic rate only; after all, the charity gets relief only at that rate, with the extra going to the donor.

IHT

The Nil-rate Band (‘NRB’) for IHT is frozen, for now, at £325,000.  The Residence NRB (‘RNRB’) is frozen at £175,000.  The point at which estates begin to lose RNRB is still £2,000,000.  No prudent Chancellor would increase these; instead letting inflation gradually increase the tax take.  RNRB and Transferable RNRB are very complicated: a simple saving might be to combine them (and possibly reduce them slightly).

There has been talk of removing the IHT relief on ‘surplus’ pension funds, ie the amount left over when a pensioner dies.  At present, this surplus can escape IHT but will be taxed when enjoyed later.  A compromise would be to tax any excess over the Lifetime Allowance.  The Government wants to encourage pension saving but this change would hit only larger pension pots.

As noted elsewhere, our rules on gifts are intensely complicated and for executors compliance is extremely expensive.  The rules could be simplified but the tax take increased at the same time.  S21 IHTA 1984 relief is vulnerable.

Woodland relief is of academic interest but affect few taxpayers.  It could be abolished.  Business relief probably serves just as well in most cases.

Agricultural relief is also, actually, losing some of its value.  Farmers are forced to diversify.  Land is gradually being used less for growing food and is increasingly given over to producing electricity.  The logic for farmhouse relief is shaky.  The relief could be abolished.   Business relief probably serves just as well in most cases, except for large landed estates. 

Business relief was, many years ago, allowed at 50% and at 30% instead of the current rates of 100% and 50%.  A swift stroke of the parliamentary pen could change the rates, leaving other changes for when there is more time to debate them.

At present, these reliefs tend to be ‘stable door’ reliefs, except where ‘clawback’ applies under ss113A or 124A IHTA 1984.  Usually, therefore, the person inheriting relieved assets can sell them the very next day without penalty.  An option might be to treat the relief as one of deferral only, so that on sale the IHT fell due.

Originally, BPR applied mainly to direct holdings in family partnerships and companies.  It was there to save businesses from a forced sale to pay tax.  Nowadays there are many collective investment arrangements designed to give private investors access to the relief.  Legislation could be introduced to curb the wide availability of the relief.

CGT

The Annual Exempt Amount for CGT is frozen at such a low level that many small investors will soon discover, to their horror, that they have landed within Self-assessment.  There will be penalties a-plenty and much work for tax advisers and for HMRC.

The rates of CGT will probably soon be aligned with those for Income Tax.  The Chancellor could do more.  She could restrict holdover relief under s260 TGCA 1992 to those situations where IHT is actually payable, allowing set-off.

More fundamentally, the Chancellor could start an investigation into ‘tax free uplift on death’ with a view to removing this valuable relief.  Its existence distorts behaviour: people delay gifts and sales in old age because of it.

NICs

There is scope here to build on what the previous government did and to merge NICs with Income Tax.  Pensioners pay no NICs but are, frankly, a greater drain on the stretched resources of healthcare and social care budgets than are younger taxpayers.  (Now aged 79, I feel that I can write that without fear of criticism.)

Yes.  As I wrote three years ago in my article ‘Looking after the family finances in the aftermath of the pandemic’, it’s still hanging there.  A Wealth Tax is still a possibility.  Like emperor Vespasian, who had to repair the finances of Rome, the new Chancellor feels the need to get money in.  It may not be enough just to let the tax yield rise gradually with inflation.  I wrote before about the document ‘Reform of inheritance tax’ (‘IHT Reform’), published by the All-party Parliamentary Group on inheritance and intergenerational fairness (‘APPG’).  The previous Government did nothing but the APPG felt that the strength of public feeling and intergenerational issues mean that ‘this is no longer a tenable option’.

APPG’s second option was to ‘tinker’ with IHT.  This did not happen.

APPG’s preferred option was to replace IHT with a new flat-rate gift tax or a successions tax.  I described this more fully in my earlier article.  It would be at a low level, such that it was not really worth trying to avoid it.  There would be little need for exemptions.  It would be a flat-rate tax on all lifetime gifts of around 10%-20%.  There would be an annual exemption of £30,000.  There would however be no Nil-rate Band in lifetime.  There would be a ‘death allowance’ of £325,000.  There would be no tax-free uplift on death for CGT.

This new tax would be levied on all assets, including farms and businesses.  Exemptions would remain for transfers to spouses (or civil partners) and to charities.  Alongside the new tax, there would be a reporting regime for all gifts over £10,000 in value, to help HMRC get a feel for what is really going on in the economy.

Forms might become much simpler.  Dealing with an estate on death might be significantly simpler.  Under our present system calculating the IHT on an event affecting a trust can actually cost more than the tax in issue.  That cannot be right.