Spring Statement: Act now before it's too late
As expected, the biggest issue of the day – the situation in Ukraine and the knock-on impact this is having on the UK economy’s recovery from the Covid-19 pandemic and contribution to the cost of living crisis – was a key focus of Rishi Sunak’s Spring Statement today. Also, as expected, it was silent on announcements of any changes to the rules, thresholds and/or reliefs of the capital taxes (capital gains tax and inheritance tax) following reviews and consultations which had taken place in 2020 and after the speculation of potential changes last spring and autumn.
Indeed major tweaks to such taxes appear to be put on hold for the time being, given the risk that the existing headroom against the Chancellor’s fiscal targets (the OBR estimates around £30bn) [ Spring Statement uses fiscal windfall to cushion historic hit to living standards - Office for Budget Responsibility (obr.uk) ] could be wiped out by relatively small changes in economic outlook, according to the Office for Budget Responsibility. However, it would be wise not to rule out such changes, in case these are targeted as a means of adding to the Treasury’s coffers. This is particularly the case with the Chancellor’s self-imposed fiscal rules in mind, and him being wary of servicing any further Government borrowing (against the backdrop of increasing interest rates), together with a focus on increasing public spending and investment. It is also worth noting that Shadow Chancellor, Rachel Reeves, highlighted the Chancellor’s failure to increase rates of capital gains tax.
The main “rabbit out of the hat” in a statement clearly focused on presenting himself as a tax-cutting Chancellor (after having been compared to Gordon Brown last autumn) was a pledge to cut the basic rate of income tax from 20% to 19% in 2024 (when inflation/debt is expected to be lower with higher growth and also, handily, possibly right in time for the next General Election). It is claimed that this will be a tax cut of £5 billion for over 30 million people.
In keeping with that overriding theme, a “Tax Plan” has been promised to herald a principled approach to cutting taxes over the Parliament and create conditions for growth. A first version of this was published shortly after the Chancellor had given his statement [Read the Tax Plan], but it remains to be seen what further detail/iterations will follow and whether indeed such plans will be possible to implement (particularly at such a volatile time).
Whilst a cut in the basic rate of income tax is indeed welcome, it is difficult to see where the money will come from, particularly with no indication of an increase to rates of capital gains tax (such as aligning them with income tax rates, for instance, as was speculated last year). We suspect that the Chancellor may be relying on fiscal drag from the last Budget, especially with inflation rising, and given the better-than-expected headroom (see above). However, this pledge (as well as the wider promise to cut taxes) may mean that rather than there being increases to the headline rates of the capital taxes, there is a tinkering around the edges, such as more reliefs being removed or limited (such as business property relief / agricultural property relief on inheritance tax). This would be in keeping with previous moves made by this Chancellor, such as the introduction of the far more limited business asset disposal relief in place of entrepreneurs’ relief announced in his first Budget of March 2020. We would therefore encourage individuals to consider planning to make the most of such reliefs whilst they are still available and in advance of the Budget in the autumn.
Whilst the new NICS levy in April of 1.25% (announced last year) is still going ahead, and deemed necessary for funding the NHS and social care, further measures to help households were announced, including an increase of the threshold at which NICS are payable (to align with the income tax allowance of £12,500) and a 5p cut in fuel duty. However, this is notably not quite as generous as our neighbours in Europe (where it was cut by 12p in France and by 17p in Ireland, for instance, or tailored to tax bands as in Portugal).
In terms of taxes on businesses, there will be an increase of employment allowance to £5,000 for small businesses, and tax credits around research and development and tax rates on business investment to be cut (with more detail to follow in the Budget in the autumn).
This Spring Statement was therefore less of an anti-climax than the Autumn Budget for the private wealth industry given it proceeded largely as expected – but it has provided further confirmation that individuals can continue to benefit from relatively favourable tax regimes (particularly with the reliefs that exist at present and which may be vulnerable to limitation/extinction) with an increased level of certainty, creating a golden opportunity for longer-term tax and estate planning. No doubt this will be music to many people’s ears given the commodity of certainty has been in such short supply over the last few years.
For instance, if inflation continues to rise, and does not fall as the Office for Budget Responsibility predict, there may be changes to the thresholds for inheritance tax (or reliefs), given the increasing number of families paying this unpopular tax. All the more reason to consider what lifetime gifting one might be able to put into place at current rates, whilst one still can.