Budget 2021: Private Client Matters

What conclusions can we draw from the 2021 Budget with respect to inheritance tax and capital gains tax?

Tax Revenues Will Rise

The effect of the private client Budget changes, which are briefly set out below, is significant because in the five years 2021/22 to 2025/26 the Budget Red Book forecasts the following increases:

  • Income Tax receipts – 27.4%;
  • Inheritance Tax receipts – 26.9%; and
  • Capital gains Tax receipts – 42.6% (yes, 42.6%!!!).

Those are very revealing figures.

Inheritance Tax Bands

The nil-rate band of £325,000 and residence nil rate band of £175,000 along with its taper will remain unchanged which doubtless accounts for the increase in inheritance tax revenues.

This increase in line with income tax expectations suggests, but only suggests, that there may be no immediate plans to increase the inheritance tax take…. yet. However, the Government is known to want to clamp down on what it perceives as inheritance tax abuse, so that may change.  Top Tip?  Keep an eye on business property relief and expect to see the rules tightened.

Capital Gains Tax Set for Biggest Rises

The capital gains tax annual exemption doesn’t change at all for 2021/22 and will remain £12,300 until 2025/26.

There was also a technical measure relating to gifts of business assets for non-residents. Section 167(2) TCGA 1992 disapplies gift relief where a transferee company is controlled by a person who is not resident in the UK and is connected with the person making the disposal. For disposals on or after 6 April 2021, a new measure will ensure that this anti-avoidance rule applies where a non-UK resident person gifting the asset also controls the recipient company. This measure effectively clarifies that rule in s 167 by ensuring that it applies when the non-UK resident person gifting the asset also controls the recipient company.

However, it is also capital gains tax that the Government expects to produce the greatest percentage increase in tax receipts of the three taxes; at first sight a dramatic 42.6%, although some of that increase may be attributed to the restrictions in business asset disposal relief (once known as  entrepreneurs’ relief) introduced last year but that increase may yet indicate that capital gains tax rate increases are waiting in the wings and some narrowing of the gap between capital gains tax and income tax rates may be on the way. There are also other, more fundamental, possibilities of radical reform which are identified in some of my earlier posts – 4th June 2020 and 1st, 16th & 17th November 2020, for instance.

These potential changes are medium term and so could materialise any time during the governments term of office  If the issues come off the ‘too difficult’ pile this year, an astute observer might just keep an eye on 23rd March  when the promised batch of consultation documents and calls for evidence is published.  That is less than three weeks away!