The Chancellor’s options for tax rises may be restricted by the Government’s commitment to its ‘Triple Lock’; its promise not to raise rates of income tax, national insurance or value added tax.

While raising inheritance tax (IHT) and capital gains tax (CGT) rates may make little difference to the significant fiscal deficit as a result COVID-19, they would be perceived by some as addressing the imbalance of wealth in the UK. Targeted tax rises could be portrayed as sending a message to the electorate that the Government is serious about the redistribution of wealth.

There has been much interest in the report by the Office of Tax Simplification (OTS) issued in November 2020. That report set out a framework of policy choices that could remove distortions, with most attention being focused on the “doubling of the rate” (by aligning CGT rates with income tax rates) and the £14 billion that might in theory be raised, assuming no change in behaviour. Other suggestions included reducing the amount of the Annual Exempt Amount (AEA), currently £12,300 and a review of the treatment of share-based remuneration and the accumulation of retained earnings within smaller owner-managed companies. The report also linked into the earlier OTS report on IHT which recommended that, where a relief or exemption from IHT applies, the Government should consider removing the capital gains uplift on death for assets transferred to beneficiaries.

If the concern of the Chancellor is to raise money to fund COVID-19 debts, CGT is an unlikely place to start. However, CGT is used by governments to stimulate desired behaviour and we expect the Chancellor to look critically at the OTS suggestions and consider what might be viable. It seems likely that at least some of these ideas, such as the cut in the AEA, might make their way into a Budget in the near future, or at least be put forward for more detailed consultation.  We may even see new life in the discussion of some of the ideas covered in the OTS proposals on IHT (such as updating the IHT reliefs and the operation of the potentially exempt transfer rules), which with Brexit and COVID-19 have stalled.

Separately, the “Wealth Tax Commission” (a non-governmental group of academics and practitioners) has looked at the benefits of the introduction of a one-off wealth tax to help bridge the gap in public finances after COVID-19. The tax they considered would be a one-off wealth tax which would: 

• Be paid by any UK resident (including ‘non-doms’ and recent emigrants) with personal wealth above a set threshold.
• Include all assets such as main homes and pension pots, as well as business and financial wealth, but minus any debts such as mortgages.
• Be payable in instalments over five years.

The paper did not suggest when the tax should be implemented or recommend specific tax rates or thresholds but does provide a range of options. The headline option was for the tax to be payable on all individual wealth above £500,000 and charged at 1% a year for five years, raising £260 billion. The report suggests this is the equivalent of a rise in 9p in the basic rate of income tax over the same period.

In July 2020, before the full extent of the COVID-19 economic crisis was apparent, the Chancellor said “No, I do not believe that now is the time, or ever would be the time, for a wealth tax”. Notwithstanding the constraints put on him by the Triple Lock commitment, we see any changes as being more likely instead to be the reform of existing taxes on wealth as discussed above.

Finally, there are two complex areas – pensions tax relief and national insurance contributions (NICs) – where the Chancellor may see the need for reform in the longer-term but where wide-ranging changes may be too much to contemplate at present.

Pensions tax relief has been a target in recent Budgets for revenue raising with reductions in the annual allowance for pension contributions and related restrictions in terms of tapering tax relief for high earners. Targeting of tax relief away from high earners may be popular in terms of getting value for the tax incentives involved but would need to avoid reopening recent issues (such as those with the NHS) or complicating the pensions tax regime still further. We may however see a move to resolve the issues associated with pension tax relief for lower paid workers (covered in the Conservative manifesto). 

In considering any national insurance reforms, the Chancellor is likely to be mindful of the categories of ‘workers’ that have been hit hard by the effects of the pandemic but been unable to benefit from many of HMT’s stimulus packages. Once seen as a likely area of focus, given the relative generosity of the Self Employed Income Support Scheme (SEISS) compared to the Coronavirus Job Retention Scheme, the continued gaps in the coverage may cause the Chancellor to pause to think in pursuing his plans to reform the taxation of work and the scope of NICs.   

While it is unlikely that the Chancellor will make any changes to NICs generally, as with pensions tax relief, we may see specific changes, such as removing the exemption from NICs for those above the State Pension age.

The issues with all the changes covered above is to what extent they materially impact the fiscal deficit. If the fiscal deficit is to be addressed, then HM Treasury and the Chancellor will need to take a view on which taxes offer the most significant opportunity to do this and may have to take a tough decision. Even if this doesn’t happen in the short-term, the Chancellor may signpost changes over the next year or so.