Jessica Jamieson, partner, and Sandy Hills, trainee solicitor, at law firm Cripps Pemberton Greenish share their insights into last months spending review.
In his spending review on 25 November 2020, the Chancellor set out the plans for Government spending for 2021/22. This brought the glum news of an 11.3% drop in UK GDP this year – worse than the 1921 recession following World War 1 and the Spanish Flu epidemic, and in fact the worst in over 300 years.
The message was clear: “our economic emergency has only just begun”. The Chancellor predicted it would take until the final quarter of 2022 for the economy to recover to its pre-COVID position. The real impact will go on longer, however, with borrowing of around £100 billion still expected in 2025. With unemployment predicted to hit 7.5% next year, public uncertainty is high and hope for national financial prosperity is low.
A new points-based immigration system was also announced, to ensure the UK’s economy is ready to attract the ‘best and brightest’ from around the world. We await the detail of this to see how this may impact on individuals looking to come to the UK, and it remains to be seen whether this will have the hoped for boost to UK businesses.
In the wake of the review, our private clients have been left feeling anxious and in the dark about what this means for the economy and their own finances. With the forecasted level of borrowing, a large hole in public resources will emerge, which will likely need to be filled by higher tax proceeds. Whilst the spending review was never intended to give any detail on changes to tax rates, and did not do so, it is clear that such a gloomy forecast has laid the ground for tax rises in the future.
In line with the Conservative manifesto, it is unlikely that income tax, VAT or National Insurance will be affected. Referring to this so-called ‘tax triple lock’ in light of the need to reduce government debt, the Chancellor told Radio 4’s Today programme: “Those promises are very important to us and we fully intend to deliver our commitments”.
It is therefore expected that capital gains tax may be first in line to help pay for COVID spending, with some changes to inheritance tax possible as well. It is thought likely that the current (and historically low) capital gains tax rates will be brought more in line with income tax rates. This could see rates doubling, with basic rate taxpayers paying 20% and higher rate tax payers paying 40% outside of the residential property market.
Inheritance tax relief for business assets could also be hit. Currently there is 100% relief from inheritance tax if a business receives the majority (more than 50%) of its income from trading. This is could be brought in line with the capital gains relief for businesses, which comes into effect if 80% of the business’ income comes from trading rather than investments.
The introduction of a an annual or one-off wealth tax on an individual’s overall net worth cannot be ruled out, although traditionally they are expensive to administer for relatively little reward. There is a tricky question as to how people would fund an annual wealth tax, given that it is being charged without any underlying transaction.
With economy shrinkage and ongoing Brexit negotiations, public uncertainty is high. For British expats, this uncertainty is severely exacerbated. In this period of insecurity we have found ourselves considering what else the current UK environment has in store for our overseas clients in the near future.
It remains uncertain how the final Brexit regulations will affect non-domiciled tax payers and British expats. Recent HMRC figures show no drastic change in the number of non-domiciled tax payers; however, in the closing weeks of the Brexit transition period, time will tell whether there will any be major shifts of capital in or out of the country. With new regulations seeing British citizens only being allowed to stay in the EU for 90 days every 6 months without a visa, and British expats at risk of losing their UK bank accounts, this question is at the forefront of private client practitioners minds.
Expats and non-domiciled tax payers have already been the target of recent tax hikes, such as the introduction of the 2% SDLT surcharge on foreign buyers. From 1 April 2021, non-resident buyers will pay the surcharge on the total purchase price of the property, in addition to the current residential SDLT a UK resident would pay. It is therefore unlikely there will be further targeted measures on expats and non-domiciled tax payers to try and fill the deficit; to do so would risk alienating foreign money, which itself will be crucial post Brexit.
In the absence of a less favourable end to the Brexit transition period, we hope that large scale roll-outs of the vaccine in the coming months will improve ongoing economic forecasts before the next Budget in March 2021. This should give us a clearer view of the economic future, enabling us to advise our clients on their personal finances with more certainty.
Jessica Jamieson, partner, and Sandy Hills, trainee solicitor, at law firm Cripps Pemberton Greenish