The unprecedented spread of COVID-19 has led governments around the world to step in with financial packages to support business and individuals through this time of international crisis.
Chancellor Rishi Sunak has unleashed a powerful £330bn package for the UK, but his televised address to the nation on 26 March made it clear that there will be a day of reckoning when tax rises are put in place to pay for the spending. An autumn Budget is likely to be where we see 'everyone chip in to right the ship' as Mr Sunak put it. One tax change that was clearly trailed was to end the distinction in tax terms between employees and the self-employed. The quid pro quo was clear: if we are to support the self-employed in the same way as employees, you must contribute equally in the future.
It was evident from the 2019 Tory manifesto that, although at that stage they promised not to increase income tax, national insurance or VAT (a promise which they may live to regret), capital gains tax had long been in their sights. Sunak's first Budget saw a drastic restriction to entrepreneurs' relief. Could headline capital gains tax rates be next? With the markets having spent weeks in freefall and billions having been wiped off the value of listed companies, investor have suffered heavy losses. Given the prospect of CGT rising in the near future, what steps should investors take before the end of the tax year?
While tax planning may be far from the minds of most investors at the moment, there is an unexpected opportunity in the current global turmoil in markets which investors should not ignore. Perhaps surprisingly, for many investors, the crisis could provide them with an opportunity to undertake some tax planning with unexpected tax benefits, which wouldn't be possible in more positive market conditions. Investors who realise a capital loss in any one year are generally able to carry this forward to use it in subsequent years. Losses will be offset against current year capital gains first, and future year gains after that. By triggering losses now, these could be offset in the future against gains which are likely to be taxed at a higher rate than the current 20%. But investors need to take action quickly to trigger these before 6 April, as CGT rates may change for the 2020/21 tax year.
It's worth remembering that everyone has an annual capital gains tax exempt amount which is currently £12,000. However, the exempt amount cannot be used if losses exceed gains in the current year. Investors who have assets which are currently standing at a loss should therefore seek advice on how best to crystallise these losses. Finally, investors should be aware of anti-avoidance rules focusing on the disposal and reacquisition of the same shares within a limited time period, but there will be opportunities to sell and acquire investments which have the same economic exposure without triggering these.
Many individuals will want to give assets away during their lifetime in order to reduce the exposure to inheritance tax on their death. This has been brought into sharp focus recently, due to possible future changes to inheritance tax which could impact the ability to make gifts free of IHT. The problem with making a gift is that it will generally trigger an immediate charge to capital gains tax of 20%. Whilst valuations are depressed and ahead of any gift tax which could be introduced, making gifts to family members before 6 April 2020 is a sensible step to manage both the IHT which might be due, and CGT which would have generally have been triggered when valuations were higher.
Many of our clients have established what are known as 'Family Limited Partnerships', effectively vehicles which allow family members to make gifts to the younger generation. They are particularly useful for clients who are UK resident and domiciled who generally cannot set up trust structures. The benefit of structuring using a FLP is they allow gifts to be made whilst ensuring that younger family members do not receive too much, too soon.
Use of trusts
Transferring assets into a trust will usually trigger a 20% charge to inheritance tax if more than £325,000 is contributed for UK resident and domiciled individuals, as well as those who are treated as 'deemed domiciled' in the UK for all tax purposes. However, exemptions and reliefs are available in respect of certain assets, for example, certain types of businesses or AIM listed shares (for now). There may also be assets whose valuations have been disproportionately affected by the crisis, which could be transferred into trust free of IHT and CGT due to their depressed valuation.
Capital losses will also be triggered on a transfer into a trust which, again, could be used to offset future gains which may be taxed at higher rates.
In light of the havoc being wreaked by COVID-19, with the infection rate and death toll climbing by the day, investors may naturally not be currently focused on managing their tax risk. But waiting until the situation recovers could be costly, so investors should be reviewing their portfolios now.