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Tax Planning Now Essential As Government Seeks To Pay Coronavirus Bill

The first six months of the Coronavirus pandemic cost the British Treasury a staggering £210 billion.  This sum covered not only the furlough scheme but also extra funding for the NHS, business grants, and PPE acquisition.  Now we must add the cost of Eat Out To Help Out, the extension of the furlough scheme to March 2021, and the buying up of the Pfizer vaccine which, along with the result of the American election, has injected a jolt of optimism into an otherwise wretched year.

The question over the coming years will be – “who pays the bill for Covid-19?”  Large public borrowing can take centuries to pay off.  For example, the payments made to compensate those who had interests in slavery when it was abolished in 1833 was finally paid back in 2015 (although the original loan of £20 million had been incorporated into another gilt).  The final debt associated with paying for the First World War was also repaid in 2015.  Like it or not (and naturally, most people won’t) extra tax funds will need to be found to cover the cost of Covid-19.

One method being proposed is to reform Business Property Relief (BPR) and Agricultural Property Relief (APR).

BPR and APR are both methods used to pass on assets without having to pay Inheritance Tax (IHT).

BPR provides for IHT relief against qualifying assets concerning lifetime transfers and a deceased’s estate.

Details of the relief available are set out in the table below.

Business Property Type Relief
Trading business or interest in a trading business 100%
Securities in an unquoted trading company which give control of an unquoted company 100%
Shares in an unquoted trading company 100%
Land / buildings /machinery / plants that are used wholly / mainly for the purposes of the trading business undertaken by either a company or a partnership 50%
Land / buildings / machinery/plants made available under a life interest that are used in a trading business carried on by the beneficiary. 50%

Businesses that will not qualify for BPR include organisations who deal primarily with:

  • stocks and shares
  • land and buildings (e.g landlords)
  • those operating in specific industries such as mining
  • NGOs

APR provides IHT relief on land or pasture that is used primarily to feed and rear animals or grow crops.  The property must be part of a working farm in the UK, Channel Islands, Isle of Man, or EEA.  The following does not qualify for APR:

  • farm equipment and machinery
  • derelict buildings
  • harvested crops
  • livestock
  • property subject to a binding contract for sale

The property must be owned and used for agricultural purposes for two years if it is occupied by the owner, a company they control, or their spouse or civil partner.  If the property is leased, it must have been used for farming practices for seven years before being transferred.

Why could BPR and APR be targeted to claw back tax to pay for the Coronavirus pandemic?

With unemployment rates rapidly rising and wages remaining stagnant, any announcement regarding increasing income tax would prove extremely unpopular.  BPR and APR are relatively soft targets – few people are aware they exist.  And there have been moves to modernise these forms of relief in the past.  Few would be surprised to see the 100% relief being reduced to perhaps 50% for qualifying assets.

BPR, in particular, is also used increasingly in tax planning mechanisms to reduce IHT and not necessarily in the spirit of the original relief.

Capital Gains Tax review

On 11 November 2020, a review by the Office of Tax Simplification (OTS), commissioned by the Chancellor Rishi Sunak, recommended that the annual allowance on Capital Gains Tax (CGT) in the UK be slashed, bringing the rates closer to those of income tax.  The OTS also suggested scrapping the “capital gains uplift”, which allows beneficiaries to inherit an asset at market value on the date of death rather than the value on the date of purchase.

Will these changes happen?

Although overhauling BPR, APR, and CGT target only a small proportion of UK taxpayers, these people provide the backbone of the Conservative Party support (as well as much of its donations).  There is also likely to be considerable backlash from company directors and self-employed people who earn over £50,000, as they received zero support from the Government during the Coronavirus pandemic.  They argue that they should not be made to pick up the bill for something they never benefitted from.

The best action to take now is to review your current circumstances with a professional advisor and take advantage of the various reliefs while you can.  For example, if the CGT uplift is scrapped, now is the time to place assets in a trust or gift to family members as the market value of the assets may be lower as the economy contracts on the back of Covid-19 and Brexit.  Making smart, strategic IHT planning decisions now could save you and your beneficiaries thousands of pounds in tax payments in future years.

For more information about any of the points made in this article, please contact Lucy Thomas on 01243 216901 or email her at lucy.thomas@legalmatters.co.uk.

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