The Finance Bill 2021 is expected to receive Royal Assent before the parliamentary summer recess in July. In his Spring Budget, Rishi Sunak laid out the Government's plan to raise sorely needed funds to cover the unprecedented cost of the COVID-19 support packages provided to businesses and individuals, and the related reduction in economic activity and tax revenues. Rather than raise taxes, the Government has chosen the less politically controversial route of taxing by stealth by freezing the amount that people can earn tax-free.
The Government announced that the annual exempt amount (that it, the gains a taxpayer can earn before paying capital gains tax (CGT)) will be frozen at the current level of £12,300 for individuals and personal representatives, until April 2026. Similarly, the income tax personal allowance and the higher rate threshold are to be frozen for a period of four tax years, starting from April 2022. The lifetime allowance for pensions will also be fixed, and no longer linked to the Consumer Price Index, for the next five years. This means the standard lifetime allowance of £1,073,100 will remain until 2026. The inheritance tax (IHT) nil rate band and residential nil rate band thresholds will stay at their current levels of £325,000 and £175,000 respectively until April 2026.
The Government has attempted to soothe the sting of these covert tax increases by introducing various short-term support initiatives, including:
- the temporary extension to the SDLT "holiday" for residential properties (as first discussed in an earlier Tax Aware article here);
- introducing a temporary extension to carry-back of trading losses for corporation tax and income tax; and
- introducing a two-year extension of the social investment tax relief.
- Whether these changes will lighten the tax burden imposed by the frozen allowances remains to be seen.
IHT rates immune from COVID-19?
Future tax rises seem inevitable. According to the newspaper "i", treasury sources have allegedly revealed the Chancellor is “moving towards” a rise in inheritance tax. This aligns with the Organisation for Economic Cooperation and Development's (OECD) recommendation for higher inheritance taxes in the wake of the pandemic, as stated in its report 'Inheritance Taxation in OECD Countries' published in May 2021. The OECD expects that this would help raise revenues, while addressing wealth inequalities. The Government is likely to consider its prospects leading up to the next election before introducing such an historically unpopular tax increase.