After delay upon delay, thanks to the Brexit impasse, the new Chancellor will finally present the government’s first Budget on March 11.
With a big majority in the House of Commons, there are expected to be some major announcements in areas from pensions to tax. Here are five things we think might change in this year’s Budget.
- Could Entrepreneurs’ Relief be abolished?
In our last edition of The Wire, we looked at how business owners can use Entrepreneurs’ Relief to benefit from a Capital Gains Tax (CGT) break when they sell all or part of a business.
The relief costs the Treasury £2.4 billion a year (relative to taxing gains at the full CGT rate) and, with the Conservatives promising in their election manifesto to ‘review and reform Entrepreneurs’ Relief’, expect to see changes in the Chancellor’s speech.
If changes to Entrepreneurs’ Relief are announced, it is likely that these will come into effect in the 2020/21 tax year. This means that there may only be a few weeks to take advantage of the current rules.
CGT rules state that when an asset (such as an interest in a business) is sold under an unconditional legal contract, the date of this disposal is the date when the contract is signed by all parties, not at completion.
This means that business owners wanting qualifying disposals to be taxed under the current Entrepreneurs’ Relief regime must exchange unconditional contracts before the law changes.
If you are already selling your business, or are about to do so, it is strongly suggested you ensure that you exchange contracts as soon as possible – ideally before the Budget on 11 March.
Boris Johnson and his chancellor are considering introducing a controversial tax on homeowners along similar lines to that of Labour’s proposed ‘mansion tax’.
No plans have been leaked of how this tax would work, but the Sunday Telegraph described it as a ‘recurring wealth tax’ that would likely hit better-off homeowners.
Another idea is to introduce an added Council Tax band for more expensive properties that sit in the current H band.
While the move may demonstrate the Prime Minister’s commitment to redistributing wealth across the country, there has already been strong resistance from Conservative MPs who believe the plans could stifle endeavour.
Former Cabinet minister John Redwood said: “The Budget must be full of optimism, promoting growth and encouraging more transactions and people to spend their wealth and income, not to destroy it.”
- Pensions tax relief back on the agenda
Another proposed move which is likely to be deeply unpopular with Conservative MPs is the plan to restrict pension tax relief to the basic rate of Income Tax.
Currently, workers receive pension tax relief at the same rate they pay Income Tax. Basic-rate taxpayers receive 20% pension tax relief, with higher-rate taxpayers receiving a 40% relief. The reforms would see the higher-rate taxpayers’ relief being cut down to 20%.
The cut affecting individuals earning over £50,000 would raise an estimated £10 billion for the Exchequer.
With this proposal strongly rumoured, it could pay to use any carry-forward pension allowance you have before the March Budget in case the changes come into force immediately.
The government does have a track record of splitting a tax year for pensions. For example, for the purposes of the annual allowance, 2015/16 was split into two ‘mini tax years’; the pre-alignment tax year and the post-alignment tax year. You cannot assume, therefore, that you will have until the end of the 2019/20 tax year to make any contributions under the current system.
If boosting your pension saving is on your agenda, it would therefore make sense to ensure you enact this before Budget day.
- Time to scrap or reform the Tapered Annual Allowance?
One of the Government’s key manifesto commitments was to hold an urgent review into the pensions Tapered Annual Allowance. It is expected this review will focus on NHS staff, but wider reform can’t be ruled out. The outcome is set to be unveiled in the Budget and there are likely to be three possible outcomes:
- The taper is scrapped altogether
- The taper is scrapped for certain types of employee; for example, NHS staff
- The threshold income for the taper is raised from £110,000 to somewhere around £150,000
The taper currently affects people earning £210,000 or more, and so high earners will be eager to see which solution the Chancellor proposes in his speech.
- Inheritance Tax to be reformed
Last autumn, we outlined nine measures that the Office of Tax Simplification (OTS) had recommended following its review into the rules surrounding Inheritance Tax (IHT).
Since then, a cross-party group of MPs have called for reforms to Inheritance Tax and there are likely to be changes announced in the Budget. Possible reforms could include:
- A cut to the rate of tax payable, from 40% to either 10% or 20%
- A reduction of the ‘seven-year’ rule to five years; or
- Abolition of the ‘seven-year’ rule entirely
- A cap on gifts, perhaps to £30,000 per annum
- Abolition of the Capital Gains Tax uplift on death and the Residence Nil Rate Band
Another approach the Chancellor could take would be to reform Business Property Relief (BPR). Subject to other conditions, BPR can give 100% IHT relief for trading assets.
The OTS report proposed that the definition of ‘trading company’ be amended to bring it into line with the test for Entrepreneurs’ Relief, i.e. the company must not be considered to have ‘substantial non-trading activities’ (typically 80% of its whole activities).
Individuals holding shares in businesses which are structured as companies should review their future eligibility to this valuable relief under the proposed new rule.
Have any questions regarding any area that may change in the 2020 Budget? Please send us a message via the HFMC Wealth website or call us on 020 7400 4700.