As I write this it has been announced that the UK is to enter a second national lockdown. In usual circumstances an announcement of such significance might necessitate a rethink of the content of this piece, however on this occasion it merely lends further weight to the original focus.
A second lockdown will mean that the Chancellor will again need to “step up to the plate” with monetary assistance for businesses forced to close and for those employees impacted. This will only further deplete the Treasury’s coffers.
The debt incurred (which is already over £2 trillion and 100% of GDP) will need dealing with at some point. If the Chancellor is looking to raise substantial sums, the biggest contributors to the tax take (income tax, national insurance and VAT which together are around 70% of total taxes) will undoubtedly need to increase in the longer term, but in the short term there is very limited scope as increasing these taxes (and we can add Corporation Tax into that mix) tends to put a brake on the economy – the polar opposite of what is needed.
Capital taxes such as Inheritance Tax (IHT) and Capital Gains Tax (CGT) actually make up a very small amount of the total tax take (around 5%) so even a considerable increase in these would likely have an insignificant impact on the total debt position, but it may well be a case of “every little helps”.
Further, we know that even before the unexpected arrival of Coronavirus, the Government was reviewing an OTS report on IHT and had initiated an OTS report into CGT. There had also been an All-Party Parliamentary Group (APPG) report on the current IHT system, though APPG reports tend to be of lesser importance.
Taken together we can see both a need to increase taxes and a Government already looking at possible changes to IHT and CGT.
It is too early to identify with any certainty the changes that will occur. I think one can say with some certainty, however, that whatever the changes, they are likely to result in an increase in the overall tax burden and a capital tax system that is less favourable than the current one.
Amongst the many proposals up for consideration are:
1. Restricting the availability of Agricultural and/or Business Property Reliefs (APR / BPR). This might, for example, involve;
- Removing APR entirely such that only those actually trading are eligible for relief (via BPR) from IHT;
- Restricting BPR such that it is only available for a business where less than 20% of what it does is not ‘trading’ (currently the relief is available if the business is not wholly/ mainly (ie more than 50%) an investment business).
2. Eliminating the CGT base cost ‘uplift’ on death such that the person who inherits the asset also inherits the CGT base cost of the deceased. This might be considered either as a complete removal of the uplift in all cases or a removal of uplift only in cases where an IHT relief or exemption (e.g. APR/BPR) applies.
The impact of these measures for those with considerable value in their business could be significant.
Taking an example of a mixed farming business that also has some investment activity (for example letting of cottages on the estate or letting of fields for solar power).
Assume that in looking at this business overall, 75% of what it does is farming, but 25% is related to the non-farming ‘investment activities’.
Under current legislation, if the farmer were to fall under the proverbial bus today, the position could be that:
- He has 100% APR on all of his agricultural property;
- He has 100% BPR on any property used in the business not covered by APR (this might include let cottages or fields with solar panels).
- Any assets left to the next generation would receive an uplift to their CGT base cost and as such would be easier to deal with given the tax consequences of a subsequent disposal are minimised.
If APR were to be entirely removed and BPR was restricted to apply only businesses that are 80% trading that same farmer might find that on his death there would be no relief from IHT at all.
If the CGT uplift on death had been removed for all assets, not only would the next generation have suffered an IHT charge on death, but they may have an asset which if sold would generate a substantial CGT liability.
It seems unlikely that in such a case there would not be a definitive absolute relief for one tax against the other, but regardless, it is clear that a death under the revised legislation would result in a considerably higher tax liability.
Moreover, if the legislation did change as above, it would render lifetime gifting more problematic, as in some cases it is the availability of the IHT reliefs that enable certain assets to be gifted in lifetime without IHT or CGT charges arising.
In my view, given all of the foregoing, it is prudent to be considering whether it makes sense to undertake some succession planning utilising currently available reliefs.
It may be that, even after consideration, the decision is to do nothing. There are many factors other than tax (including personal and family circumstances) that need to be taken into account when considering such planning.
It may be, however, that the likely ‘hardening’ of the capital tax system alters the plans that were already in place. The decision to ‘hold until death to take advantage of reliefs’ becomes more marginal if:
- The reliefs might not be there on death; and
- If left too long, lifetime gifting may also become an issue.
That is not to say that everything needs to be passed on immediately. In many cases succession from one generation to another is a journey taken over many years. It may be that some steps could be taken now in relation to certain assets / parts of businesses to mitigate the impact of possible future legislative change without passing on the whole business.