Will tax hikes support economic recovery from the pandemic?
- Professional financial advisers believe tax hikes will be counterproductive for the UK economy
- Chancellor Rishi Sunak urged to focus on stimulus measures that will boost UK economic growth
- Financial experts offer advice to parents and grandparents on Inheritance Tax rules
- Hell’s Kitchen star, Gordon Ramsay, calls for a VAT extension for the hospitality sector
The topic of tax has become a hotly debated topic ahead of Chancellor Rishi Sunak’s Budget announcement on Wednesday, March 3rd.
There has been growing speculation that Mr Sunak will increase an abundance of taxes to help shore up the economy.
However, in a survey of 202 financial advisers conducted by Aegon, more than 75% of respondents said that tax hikes would harm UK economic recovery.
That being said, Aegon revealed that nearly 50% of those surveyed said they would support an increase in Capital Gains Tax (CGT), and 33% of respondents said they would back an increase in income tax for taxpayers with a taxable income at the top of the spectrum.
Conversely, 19% of respondents said they would get behind an increase in inheritance tax, which has been rumoured to be one of the tax policies that could undergo significant reform.
Meanwhile, 15% of survey participants said they would support a wealth tax hike on those with personal assets worth over GBP 500,000, and just 10% advocated an increase in National Insurance Contributions (NIC).
According to Aegon, most survey participants stressed that the Spring Budget should focus on initiatives and stimulus measures that would nurture growth instead of tax revisions.
Aegon Pensions Director Steven Cameron said that 82% of financial advisers suggested that the UK economy is in a very fragile state and that revenue-raising measures would negatively impact economic growth.
There has been widespread expectation that Britain’s vaccine rollout will lead to an earlier easing of lockdown restrictions which would boost the UK’s gross domestic product (GDP). Bank of England (BoE) Chief Andy Haldane also said that he expects a spending boom to be unleashed once British Prime Minister Boris Johnson lifts lockdown restrictions.
However, given that the UK is expected to record a staggering GBP 350BN deficit in the 2020-21 financial year due to the Coronavirus pandemic due to ballooning government debt, the Chancellor will have to do more to return public finances to a more sustainable level.
Aegon Pensions Director Steven Cameron said that “while no-one is fond of tax hikes, the Chancellor could raise CGT amid recent support for reform in this area.”
However, he notes that this will likely result in protest from the wealthy and small businesses entrepreneurs, whom the UK government will want to protect as many are already in dire straits due to the pandemic.
As other tax policies are being debated, including Inheritance Tax (IHT), financial experts have warned those affected to be aware of tax traps.
Beware of the “tax trap” that could cost thousands
According to new research from the financial services network Openwork, parents and grandparents are at risk of facing hefty tax bills in the foreseeable future for cash gifts to loved ones.
Openwork revealed that approximately 20% of UK residents, the equivalent of 6.3 million people, have given cash gifts exceeding GBP 3,000 to loved ones without making a declaration to HMRC.
The survey of 1,280 adults, which included more than 700 parents and grandparents, revealed that nearly 50% of those with children or grandchildren were unaware that they could receive a tax bill for cash gifts.
Meanwhile, 38% of parents and grandparents did not know inheritance tax rules and the potential risks of offering financial support.
Inheritance tax refers to the tax on a deceased person’s estate, encompassing money, possessions and property through to probate.
Currently, the standard inheritance tax rate is 40%, which is only payable if the value of an estate exceeds the GBP 325,000 threshold.
In some circumstances, the HMRC may raise the threshold to GBP 500,000. There is never usually tax to pay on assets worth less than GBP 325,000, or if the property, possessions and money are left to a spouse, civil partner, a charity or community sports club.
However, due to the growing dependence on parents and grandparents’ financial contributions in modern society, Openwork advises those who are impacted to make themselves aware of the rules and risks of intergenerational cash gifting.
What are the rules on Inheritance Tax?
Several professional advisers, including financial journalist Martin Lewis, have raised awareness of tax rules surrounding inheritance and pensions.
Currently, the rules on Inheritance Tax are that gifts of up to GBP 3,000 given to loved ones during a financial period will not be subjected to taxation.
However, cash gifts that exceed GBP 3,000 could be added to the value of someone’s estate if bestowed within seven years of that person’s demise or passed onto the person receiving the gift in the form of a tax bill.
Financial gifts have become increasingly common in the last few years, with many parents and grandparents using their earnings to contribute to a family member’s mortgage deposit.
According to the Halifax House Price Index in December, the average for first-time buyer deposits increased by GBP 10,000 in 2020 to GBP 57,278.
Mike Morrow, Chief Commercial Officer at Openwork, said: “It is natural for families to want to help each other financially when they can, and it’s becoming increasingly important given rising property prices and the financial impact of COVID-19.”
However, approximately 1 in 5 people in the UK fail to declare gifts worth more than GBP 3,000 to HMRC, citing confusion over tax rules. Even those that are aware of the potential tax repercussions still find the rules complicated.
HMRC warns that tax on several forms of Inheritance Tax relief is payable, and depending on when the recipient received the gift, a 40% charge could be applied.
Some cash gifts that are given while you were alive may also be taxed after your death. As Chancellor Rishi Sunak could tighten Inheritance Tax rules in his upcoming Spring Budget, experts advise seeking professional help and guidance with IHT planning.
The Chancellor could leave a big dent in pension pots amid growing expectations that he will announce the reformation of inheritance tax, capital gains tax and pension relief.
Changes to business rates relief and VAT are also being debated; however, Mr Sunak is being pressured by the hospitality industry to extend VAT cuts to boost recovery in the sector.
Gordon Ramsay urges Chancellor Rishi Sunak to extend VAT cut
Hospitality professionals, including the renowned chef Gordon Ramsay, have pressured Rishi Sunak to extend VAT cuts to support the struggling hospitality businesses.
During one of Mr Ramsay’s “In Conversation” meetings, he told the Chancellor that bars, pubs, and restaurants need urgent support to secure their post-pandemic futures.
Gordon Ramsay commended the Chancellor for the furlough scheme and business rate holiday, which he said has offered a lifeline for firms and employees but said the outlook is bleak without further support.
Rishi Sunak slashed VAT for pubs and restaurants to 5% to support businesses through the coronavirus crisis. However, the measure is due to expire on March 31st 2021, and most hospitality businesses are reeling from the impact of the third national lockdown.
Tory MP Steve Double said that hospitality businesses could spearhead the UK economy’s revival and got behind calls for the VAT cut to be extended for the sector.
While much remains uncertain, Rishi Sunak did offer a glimmer of hope after telling Gordon Ramsay that the hospitality industry is “economically significant, but also it’s that connection with people in their communities.
Hospitality businesses will be keen to see what the Chancellor proposes in his March budget concerning the VAT holiday and other initiatives to support the industry, which is facing financial ruin.
