For financial professionals only
Consequences of Covid: the impact on generations
The coronavirus outbreak has drawn stark lines between generations. Older people are categorised amongst the most vulnerable, and many are suffering loss, ill-health, and loneliness. But the impact of the virus has been felt strongly across other age groups, too. And the true costs to the economy, society and our future generations will only be known in time.
In this series, we will explore the likely long-term financial impact for people at different stages of life, and where their advice needs will lie in years to come.
Who will be financing the fiscal stimulus?
The Chancellor’s response to the pandemic has been significant. Government spending is likely to be more than £370bn this financial year1, an almost inconceivable figure. That spend needs to be paid for, so we know the government will be looking to raise revenue – cue Rishi Sunak asking the Office of Tax Simplification to undertake a review into Capital Gains Tax2.
Nothing is certain, except death and taxes
The consultation, which comes to an end in just over a week’s time, will cover allowances, exemptions, reliefs and the treatment of losses. Importantly, it considers individuals and smaller businesses, though with Entrepreneur’s relief so recently restricted3, punitive changes to the latter seem unlikely from a Conservative government with a much lauded “plan for jobs”4.
One of the most significant CGT reliefs is the Primary Principle Residence exemption – but with the residential property market in a lull, this would be a strange target for the review. Likelier would be a reassessment of the exemptions for “wasting assets” which cover high value property such as classic cars, or some vintage wines.
Perhaps the most obvious area for reconsideration would be the 2017 reduction in the rate of CGT, which is currently just 10% for Basic Rate taxpayers on most chargeable assets5.
With IHT reviewed only recently, it’s possible that findings here will feed into the CGT review. A removal of the CGT uplift on death for bequeathed assets, for example – especially if they’ve already enjoyed IHT relief. This would have a more targeted impact on the wealthier in society compared to sweeping changes to the rates at which CGT is applied, which would be more palatable from the political perspective. Let’s not forget this is a Conservative government looking not only to balance the books, but to build on their unexpected success in the Labour heartlands 10 months ago, while simultaneously locking those local economies down.
Make hay while the sun shines
While we can speculate, nothing will be clear for some time after the OTS announce their findings, with the Chancellor having deferred the Autumn Statement. At that point, it may be necessary to reconsider if the client’s long-term plan around their Estate (for example) remains appropriate for their needs.
In the meantime, advisers can discuss the opportunity with their clients to make the most of allowances and low rates while they remain available.
Whether IHT or CGT is front of mind, gifting is a useful tool at your disposal.
Annual gift exemptions mean £6,000 (per married couple) can be moved immediately outside the Estate – and with so much disruption to weddings in recent months, parents and grandparents may wish to utilise the additional related allowances here to help loved ones out in a tax efficient way6.
With gifts between spouses exempt from CGT, they can be an excellent means to utilise both partners’ annual allowances. If monies need to be raised, where one spouse is on a lower tax rate than the other, it would be sensible to crystallise any necessary gains in their name up to that basic rate band while it remains so low.
Now more than ever it makes sense to maximise the monies held in tax-efficient wrappers – make sure annual allowances are fully utilised for ISAs and pensions, including carry forward allowances for the latter, to protect those savings from potential future tax hikes. With the APS in place to preserve ISA benefits even on death, and IHT benefits on the pension pot (subject to those all-important, up-to-date nomination forms!), such activity is sound planning not only for your clients, but their beneficiaries, too.
[1] BBC.co.uk 2020 Coronavirus: How much will it cost the UK? – 2020 [online] Available at: https://www.bbc.co.uk/news/business-52663523 [Accessed 28 October 2020]
[2] Citywire.co.uk 2020 Sunak calls for independent CGT review – 2020 [online] Available at: https://citywire.co.uk/wealth-manager/news/sunak-calls-for-independent-cgt-review/a1380355 [Accessed 28 October 2020]
[3] Gov.uk 2020 Change to Entrepreneurs’ Relief lifetime limit for Capital Gains Tax – 2020 [online] Available at: https://www.gov.uk/government/publications/change-to-the-entrepreneurs-relief-lifetime-limit-for-capital-gains-tax [Accessed 28 October 2020]
[4] Conservatives.com 2020 Our Plan for Jobs: Our £30bn investment in Britain – 2020 [online] Available at: https://www.conservatives.com/news/our-plan-for-jobs [Accessed 28 October 2020]
[5] Gov.uk 2020 Capital Gains Tax – 2020 [online] Available at: https://www.gov.uk/capital-gains-tax/rates [Accessed 28 October 2020]
[6] Gov.uk 2020 Inheritance Tax – 2020 [online] Available at: https://www.gov.uk/inheritance-tax/gifts [Accessed 28 October 2020]
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.