SUNAK’S TAX RISES – FIXING THE DEBT BURDEN
In the U.K. the ratio of debt to GDP has reached levels that have not been seen since the Second World War as Covid’s massive economic devastation has been, and continues to be, instantly evident. Substantial monetary and budgetary initiatives have been adopted to include wide-ranging government-backed assistance, including the distribution of different aid packages in staggering numbers – Revenue must come from elsewhere to raise public funds.
The argument about how to close the gap between government spending and revenue could flare up in light of Covid, leading to inevitable adjustments in the UK tax structure, a necessary evil required to raise funds and reduce the increasingly rising national debt.
On March 3rd, 2021, the spring budget is due, and it seems likely that some tax increases, and even completely new ones, will be included in this.
What taxes will increase and which taxes could be introduced?
Many are shocked by a Treasury move to hit small business with 5% corporation tax increase to help repay Covid debt. The expected reduction to 17% in 2020 did not occur, and Chancellor Rishi Sunak is considering raising the rate to 24%. Economists and corporate execs have criticised this notion as being likely to stifle recovery. Such a move would further damage sole traders and others who have already missed out on government COVID-19 financial support.
With too many firms already brutalised by the COVID-19, and further Brexit reforms, Mr Sunak may be hesitant to increase corporate tax by this much.
Capital gains tax (CGT)
One thing most analysts appear to agree on is that there is likely to be an increase in the rate of CGT. CGT thresholds on basic rate taxpayers are 10 percent (or 18 percent on residential property) and 20 percent (28 percent on residential property) for higher rate taxpayers. Compared to those on earned income, these rates are low, most of it is levied at 40 percent or even 45 percent, and the difference has been called into doubt.
One of the proposals is for the government to consider aligning the rates of CGT with the rates of income tax more closely- it also recommends considering the reinstatement of relief for gains which are simply due to inflation.
Although a rise in the CGT seems inevitable, in certain cases, the tax essentially remains voluntary as many will simply consider hanging onto assets rather than getting rid of them.
A Wealth Tax
The Institute of Fiscal Studies announced in July what was termed a “Wealth Tax” initiative to gather data on the concept of a tax on assets or particular assets. The Wealth Tax Commission report was released on 9 December, proposing that if the government is looking to collect tax revenue it should consider a one-off ‘Covid Recovery Tax’. An annual income tax was not suggested by the commission.
This seems less likely to happen now than it did a few months earlier after Mr Sunak dismissed this recommendation by the Wealth Tax Commission to impose a tax on those with assets above £500,000, labelling it as “un-Conservative”
Despite the need to maximise taxes, it appears like short- and medium-term tax hikes are necessary. Advisors may like to propose taking advantage of the current lower tax rates, combined with comparatively low asset prices, to do so before March.
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