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This article was originally published on ePrivateClient. Read the article here.

The coronavirus crisis has seen UK Government borrowing reach a record high, with the highest debt to GDP ratio since 1960. At some point, the Government will need to balance the books as Britain looks to the future.
There has been considerable conversation around increasing taxes or new taxes and recent activity strongly suggests this is on the Government’s radar. The all-important Autumn Budget has been postponed. As recently announced, there will be another Budget in March, leaving little time to adjust should material changes be implemented. Next year’s Budget could be substantial, with potentially major reforms for UK taxpayers.

 

Looking ahead, should we expect some substantial changes to the existing tax framework in the UK?

One thing is for certain – the tax burden is not going to be reduced. There has been speculation that CGT rates may be set to increase as part of the Government’s response to support its spending burden. Some advisers might take this opportunity to look at their clients’ unrealised capital gains to realise them under current rates and rules before any surprises from a new Budget. 

When it comes to inheritance tax (IHT), Lombard International Group has seen an increase in activity, and particularly the number of donations. The question is whether proposals in the OTS or All-Party Parliamentary Group* reports on IHT might be adopted, and on what time scale. Income tax, National Insurance and VAT of course remain the biggest contributors of tax revenue.

A wealth tax is a point of discussion for many (see October’s Wealth Tax Commission Evidence Paper, for example) and has been repeatedly suggested as a solution to offset some of the Government’s spending. Recent research by Ipsos Mori found that wealth tax was the most preferred option (41%) out of ways to raise revenue, followed by an increase in CGT* . A survey by the Financial Times found that half of their readers would support a wealth tax while 45% would not* . The wealthy are generally seen to be better equipped to protect themselves from the impact of COVID-19 and, on paper, it seems a simple solution to ensure lower income families do not shoulder a disproportionate burden. 

However, this type of tax is not a straightforward measure.

As well as being a problematic tax to design and costly to carry out, it is tricky to assess and identify those assets to which it should apply. It can also come with liquidity issues for individuals holding predominantly real estate or other assets that are hard to realise. It is perhaps unsurprising that many European countries have moved away from the tax, but, the financial and political benefit from pursuing such a wealth tax could prove irresistible. There are examples (Switzerland among them) of this not only working but also contributing a reasonable portion of tax revenue.

Therefore, which wealth planning structures should advisers consider for their clients in the current situation?
Advisers should be looking to evaluate their clients’ current wealth and estate structures and consider how they would fare in possible 2021 scenarios. Lombard International Group have certainly seen an acceleration in HNW planning activity recently, as the pandemic has raised awareness of the importance of foresight to weather uncertainty.

Wealth planning strategies and the relevant structures to use should be adjusted according to an individual client’s situation, but generally, trust, corporate and insurance-based solutions are considered relevant in the current environment. Nonetheless, while Trust and corporate solutions are common in the UK, they can become less powerful when it comes to international portability. Similarly, depending on the new host country, it can be cumbersome to relocate with, unwind or redomicile, family companies. Insurance-based wealth solutions remain highly portable on transfers of residence.

While there is uncertainty around the timing or extent of any measures, and independent advice must always be taken, the prospect of higher rates and/or changes to tax may tip the balance for some. Simple, cost-efficient ways to protect wealth, retain control, and add flexibility will be in growing demand.
 


Simon Gorbutt
Director, Regional Head of Wealth Structuring Solutions
Lombard International Assurance

[1] The All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPG IIF)
[2] Ipsos Mori https://www.ipsos.com/ipsos-mori/en-uk/britons-support-paying-more-tax-fund-public-services-most-popular-being-new-net-wealth-tax
[3] Financial Times https://www.ft.com/content/eaf835aa-a6e1-4b82-82cd-53d4e5bf10fe