No (real) change there then… Tax Day and Government response to the Office of Tax Simplification

30 November brought the next ‘Tax Day’. The recently introduced phenomenon whereby UK Government issues documentation on a raft of tax matters. There is much to choose from and something for everyone. We will sate our appetite on estate planning related papers.

The OTS and IHT

The Office of Tax Simplification previously issued reports on inheritance tax. Some of the topics were administrative in nature and aspects of those matters will be coming into being soon. Other issues considered by the OTS were meatier. Changes to gifting rules as well as business and agricultural property relief were all in the mix.

The Government has now responded to the OTS saying it will not take forward any of the OTS’ proposals on those more substantive matters. The Government’s foundation for not doing anything being the need to consider the “wider context”. We are not Mystic Meg but when discussing the OTS reports when issued and looking at the possibility of inheritance tax change in light of ‘paying for the pandemic’ we have noted that there is one really (really) vital factor that always matters: the politicians. It is a matter of policy for Government. That is the essential ingredient present in significant inheritance tax rule changes throughout history.

While many will generally welcome this outcome we need to be alive that Government policy can change. The Government signed off on inheritance tax reform by saying it “will bear [the OTS’] very valuable work in mind if the Government considers reform of IHT in the future.”

The OTS and CGT

The OTS had also been looking at capital gains tax. Here the Government will take on some matters of “practical simplifications for taxpayers“. On more significant developments to CGT, the Government (as with IHT) will not proceed with the proposals as “these reforms would involve a number of wider policy trade-offs.” Again, the key policy ingredient to provoke change is missing.

In a number of quarters it will be viewed as positive that there are to be no major changes to capital gains tax. And in the interaction with succession planning on death, it will be welcomed that the ‘uplift’ in values to the date of death value has a reprieve for now. The Government is to adopt some changes to capital gains tax. The change to reporting after the sale of a property has already been announced and there will be alterations relating to transfers of assets connected to divorce and separation. In one outcome that taxpayers will be less pleased about, Government has rejected the OTS proposal on deferring the payment of capital gains tax in a case where there is deferred consideration on a disposal.

Regulation of the tax advice… the consultation outcome is a fresh consultation

There had been a consultation on the issue of tax advice regulation and in particular a possible requirement for those providing such advice to have mandatory professional indemnity insurance.

The result of the consultation is that that specific proposal will not happen at the moment. The view being that insurance alone is not the answer. There are wider considerations and with that a further consultation will be expected to be launched in 2022. The themes of “clarity of standards required”, “transparency” and “effective enforcement” to be central to the next steps. The Government has also said it will test a definition of “tax advice”.

The five year review of… the Office of Tax Simplification itself

In the legislation setting up the OTS there is provision for a five-year review of its workings. Tax Day saw the publication of that review.

In the foreword to the review, the First Secretary the Treasury said: “The government is committed to supporting the OTS in continuing to play that important role [to improve the experience of taxpayers]. For this reason, the Review not only examined the effectiveness of the OTS in advising the Chancellor on tax simplification, but also considered what further steps should be taken to enhance the effectiveness of the OTS in future.“

The recommendations from the review include:-

• reveal the reasoning behind OTS recommendations, particularly where there are trade-offs between simplification and other policy objectives that government must consider;
• more clearly prioritise those recommendations which the OTS considers of most value to taxpayers;
• maintain and expand the breadth and balance of knowledge, experience and expertise within the OTS, while also seeking professional expertise in how it consults externally;
• consider the volume and type of output it produces, and focuses more on activities that build its preliminary evidence base and embed its work; and,
• clarify its aims and objectives in light of its articulation of how it interprets ‘tax simplification’, using this to inform which areas it will prioritise over the next five-year period to maximise its impact.

As we have noted, policy is critical to any ultimate changes to tax rules. That is an important point to consider in the OTS’ work. The five-year review recognises that when examining issues of ‘simplification’, policy points will arise and Government expressly accepts that. While accepting that, Government said in the review, “it is for government to consider the OTS’s recommendations and their potential impact in the round, determine whether unavoidable trade-offs are acceptable, or if the existing complexity is necessary to achieve other policy objectives. The importance of tax simplification does not alter the fact that it is for the government alone to make decisions on tax policy.” (our emphasis)

For help and advice on succession law and related issues, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07470808717.

“Alan Eccles is an excellent lawyer with a brilliant manner with clients – he relaxes them and builds confidence,” while another comments: “He is diligent, makes the complex understandable and is very approachable.” Chambers High Net Worth 2021 directory

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

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Wealth Tax: a wardrobe monster?

The classic John Smith’s advert featuring Peter Kay reminded us that we shouldn’t worry about the wardrobe monsters – instead be worried about the burglars. We will return to this.

The Wealth Tax Commission has issued its report today. A quite monumental piece of work in many ways with copious amounts of background research and papers. A wealth (geddit?) of material that could be utilised for some time when considering tax policies and ideas. Whatever happens, it is a serious contribution to the general tax ‘conversation’.

What has the Wealth Tax Commission proposed?

Well, to start, the Commission is not recommending anything, as such. It has analysed different methods of a wealth tax working (particularly one-off versus annual). It also aimed to provide food for thought for government on mechanisms as well as matters of principle on how a government might address the need to raise a significant or (per the Commission) “exceptional” amount of tax. The Commission did note possible changes to other taxes that might be required to raise the same “exceptional” amount of tax as a potential wealth tax. Overall the Commission tends towards a one-off wealth tax rather than an annual version. The Commission concludes that if an annual wealth tax was preferred by government that a better approach would be a wholesale restructuring across the board for tax.

The Commission concludes that a well-designed one-off wealth tax would (to raise £260bn in revenue) be at a rate of 5% over £500,000 per individual or (to raise £80bn) at a rate of 5% over £2 million per individual, payable at 1% per year over five years.

If an one-off wealth tax was adopted, it could be something branded as a ‘Covid Recovery Tax’. Its one-off nature would be underscored by the tax being assessed on the day of announcement. This is partly designed to minimise scope to avoid the tax.

The Commission has recognised, and considered acceptable, the practical and logistical issues of seeking to value all wealth (homes, land, pensions, businesses, investments, trusts…) at a single point in order to assess the tax.

As an aside, the Commission’s consideration of an all-encompassing approach to tax across all assets interests us. Tax sometimes drives the legal structures people adopt. But it is more important to consider the overall characteristics and benefits a structure gives. Often, it is the very fact it provides structure that matters.

The tax reform ‘recipe’: politics

The Commission is not recommending that a wealth tax is the way forward for tax and revenue-raising. Who knows if a wealth tax would happen. Other countries have tried it and some have then ditched it or watered it down. The movement away from a wealth tax coming either from unpopularity or the logistics of running the tax. It will, as the Commission says, be down to politicians to consider and then decide to bring in any form of wealth tax.

BUT, the Commission’s work puts tax in focus again. We have had the Office of Tax Simplification consider inheritance tax and more recently, and perhaps more sharply, capital gains tax. The covid situation means the government has been spending huge amounts and will need, at some point, to attempt to recoup some of that expenditure. There is (nervous) anticipation for Spring Budget 2021. So, as we blogged on before, what has historically mattered on capital tax is the simultaneous presence of key ingredients: a tax reform/revolution cake recipe. The Great British Tax Off, if you will. We have previously said that the recipe appears to be: (1) tax is too complicated; (2) tax is not ‘fair’; and (3) the macro-economic situation creating a political momentum for change. The latter factor being the determining factor underpinning change.

Wealth Tax as a wardrobe monster

Maybe there will be a wealth tax. We suspect there will not be. (If there is, we could just delete this blog and the prediction never happened!!) A wealth tax feels like a wardrobe monster. It is scary. It is in our mind. It gives us nightmares. It makes you peer with one eye from under the duvet. But it does not exist.

Meanwhile, the burglars are out there. The burglars here are other taxes that do exist and are sitting there ready (potentially with reforms and updates) to tax your wealth. Maybe there will be a wealth tax, but for now, planning to protect you, your family and business from the current tax regimes would seem to be the way to help you sleep better at night.

As Peter Kay ended the chat with daughter, Britney in the advert, “sweet dreams“.

For help and advice on succession planning and related issues get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07470808717.

“An experienced lawyer” who is “a superb strategist and is extremely knowledgeable”. Chambers High Net Worth 2020 directory

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory

Alan Eccles… a Legal Influencer for Private Client (UK) – Lexology Marketing Awards

Inheritance tax: a recipe for change and a time to act?

There have been a number of recent reviews of inheritance tax. Following these reviews by various bodies, my conclusion has consistently been that it will be a government need to pursue a particular (economic) policy agenda that will result in changes to inheritance tax. The political/economic mix matters a lot; technical tax reform less so. We might just have the political/economic element in the present circumstances to drive change. History has given us some examples of this.

With the spectre of the factors that lead to change, now is a time to actively consider estate planning. As well as the risks of reform, there are also other reasons why estate planning steps should be considered at the moment.

Why take action now?

The history of major changes to inheritance tax indicate there needs to be a few ingredients before reform happens. The ingredients in question seem to be: (1) the tax is too complicated; (2) the tax is not ‘fair’; and (3) the macro-economic situation creating a political momentum for change. The final ingredient (macro-economics and politics) is the decisive one.

The three ingredients seem to be coming together again. In the face of that, there is action that individuals and families as well as business owners and farmers should now consider.

Horrible Histories? What has happened before?

1894 saw the introduction of the modern notion of an inheritance tax: estate duty.

The late 1940s however saw significant reform and tax rates increasing (hitting 80%). The vital mix for change was present (1) the tax in its existing form had become complex and unwieldy with overlapping regimes in place; (2) the tax was considered to be ‘unfair’ as modest estates were likely to attract a higher marginal rate than larger estates; and (3) the United Kingdom was funding post-war reconstruction.

Fast-forward to the March 1974 Budget. While top rate inheritance tax (estate duty) went up to 85% in 1969, the 1974 restructure was even more dramatic. The rates came ‘down’ slightly to 75%. But, and this was a significant but, the tax was greatly widened. As well as capturing what happened on death, the tax now captured gifts made during life. The tax was now re-branded as capital transfer tax to reflect its wider scope as a more general wealth transfer tax. Again, the critical elements were there: (1) estate duty was viewed as needing streamlined and made ‘comprehensive’; (2) estate duty was said to give some in society ‘unfair advantages’; and (3) there was the Three-Day Week, an oil crisis, inflationary pressures and industrial unease.

In 1986 inheritance tax was the new name on the block. The ingredients for change seemed to re-appear for Nigel Lawson’s Budget: (1) capital transfer tax was viewed as two taxes meshed into one; (2) it was unfair and an “unwarranted impost” that deterred passing on assets; and (3) the mid-1980s UK economy was in something of a sweet-spot and liberalising the economy was en vogue. The new inheritance tax removed the tax on lifetime gifts to individuals. It also ultimately led to the current system of nil rate band and 40% rate (in 1988), 100% Business and Agricultural Property Relief (in 1992) as well as being able to ‘use’ a nil rate band every seven years.

Let’s peer into 2020. Inheritance tax has had some changes since 1986, but no fundamental re-think. In 2019 and 2020 the Office of Tax Simplification (“OTS”) and the All-Party Parliamentary Group on Inheritance & Intergenerational Fairness (“APPG”), amongst others, have reported on reform. The OTS recommended reform in a number of areas to make the tax less complicated. So, we have ingredient one.

The APPG’s review concluded that inheritance tax is “distortionary” and “unfair” as well as there being wealth inequality that tax was not responding to address and understand. The second ingredient has been identified.

What about the third usual suspect ingredient? Well, that is not difficult to find. There is a global pandemic which apart from being a health crisis is an economic crisis. The extent of the economic crisis and the speed at which it happened means the government stimulus programmes have been costly (The Telegraph reports the Treasury’s best case estimate is £300bn) and the cost quickly incurred.

Government will now be anything but flush. Government will have options about how to pay this down. One option will of course be to increase tax. Inheritance tax could be changed to generate increased tax receipts. HMRC took a record £5.4bn in inheritance tax in 2018/19. But remember the Conservative Party manifesto pledge not to increase the rates of income tax, national insurance or VAT. George H W Bush’s pledge of “Read my lips: no new taxes” and what happened next is one to send shivers down the back of any government.

How might inheritance tax change?

Inheritance tax was not part of the election pledge, so there is more flexibility. But inheritance tax does strike an emotional chord (with key voters) and so ‘putting up’ the tax by increasing the standard rate from 40% or cutting the nil rate band is perhaps less likely. Instead, something akin to 1974 could be deployed. Something that fits neatly with the APPG’s recommendations. The APPG is in favour of bringing back lifetime transfer taxes. It also favours removing the very valuable reliefs for trading businesses and farms. It also recommends removing the use of a nil rate band every seven years as well as abolishing the important, but for many obscure, capital gains tax ‘uplift on death’.

If there could be moves to tax/restrict lifetime gifts and/or remove the favourable treatment of businesses and farms, now is the time to actively look at estate planning. The time to take action to explore passing on wealth and have it held on the right basis for future generations.

To discuss estate planning, get in touch with Alan Eccles – alaneccles@bkf.co.uk / 07470808717.

Alan Eccles is “one of the leaders in private client expertise in Scotland.” Chambers High Net Worth 2019 directory