Personal Finance

TAX CORNER: Will the Chancellor increase taxes in his Autumn 2020 Budget to pay for Covid-19

Chancellor of the Exchequer Rishi Sunak walks through from the foreign office to Downing Street after the introduction of measures to bring the country out of lockdown. PA Photo. Picture date: Friday May 29, 2020. See PA story HEALTH Coronavirus. Photo credit should read: Aaron Chown/PA Wire
Chancellor of the Exchequer Rishi Sunak walks through from the foreign office to Downing Street after the introduction of measures to bring the country out of lockdown. PA Photo. Picture date: Friday May 29, 2020. See PA story HEALTH Coronavirus. Photo cr Chancellor of the Exchequer Rishi Sunak walks through from the foreign office to Downing Street after the introduction of measures to bring the country out of lockdown. PA Photo. Picture date: Friday May 29, 2020. See PA story HEALTH Coronavirus. Photo credit should read: Aaron Chown/PA Wire

Q: Do you expect that Chancellor Rishi Sunak will increase taxes in his Autumn 2020 Budget to start to recoup the costs of the Covid-19 pandemic support measures?

A: The well-publicised £300bn gap in public finances caused by Coronavirus is certainly going to require some form of tax increases to begin to close the deficit.

We will undoubtedly see an increase in tax investigation activity by HMRC however ironically it could be counterproductive to increase the direct tax burden on businesses just as they are trying to get back on their feet following long periods of shut down.

Equally, a VAT increase is unlikely as this would dampen consumer demand just when retailers need people to resume former spending patterns.

For this reason, therefore, the Chancellor is more likely to target wealth taxes and capital tax areas such as Capital Gains Tax (CGT) and Inheritance Tax (IHT) are almost certain to come under some sort of review this autumn.

It is not that long ago when Capital Gains were treated as the top slice of one’s income and taxed at marginal rates – at that time 40 per cent.

However, successive Chancellors have reduced Capital Gains Tax to create a situation today where money earned from employment or business activities (trading) is taxed more heavily than that earned from investment activities.

There is a ground swell of opinion that this situation should be reversed and that we should go back to the old system of taxing capital gains at marginal rates.

The generosity of the UK Capital Gains Tax regime has already been attacked by the Chancellor when we saw the replacement of the very generous Entrepreneurs Relief for Capital Gains Tax (£10m lifetime allowance taxed at 10 per cent) to the new Business Asset Disposal Relief (BADR) which is only given at one tenth of the previous Entrepreneurs Relief level.

This targeting of taxing capital gains / investment activity heavier than trading activity is likely to continue.

As death is not a capital gains tax event virtually no one pays capital gains on an inheritance which is disposed of shortly after its receipt as on death the asset inherited is deemed to be acquired at the market value at the date of death. This is exactly the type of area that is going to come under scrutiny by Mr Sunak’s review which he has asked the Office of Tax Simplification to carry out.

Other CGT reliefs likely to come under scrutiny are the reliefs allowed when selling a second property that has at some stage been your main residence and these include the final 9-month tax free period and the £40,000 lettings exception which applies when the property had been let previously.

Finally, the annual Capital Gains Tax free allowance of £12,300 could be reduced to the level of the dividend tax free allowance of £2,000.

In summary therefore, the UK taxpayers Capital Gains Tax position is unlikely to improve in autumn rather it is more likely to deteriorate and therefore anyone contemplating Capital Gains Tax transactions would be well advised to perhaps accelerate them before the Autumn Budget.

Paddy Harty (p.harty@pkffpm.com) is a senior tax director at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.