What follows are a few thoughts on how taxation policy might need to change in order to meet the extraordinary public spending commitments caused by the Coronavirus pandemic.
But first, I thought I would include a table showing the average duration of Bull and Bear markets and their respective "heights" and "depths". The table shows the highs and lows of UK Bull and Bear markets from the 1920s to the present day and as such, it includes every stock market crash in the last 100 years and there have been lots.
Bull and Bear Markets.
Source: Money Observer May 2020/Timelineapp Tech
Average Bull duration 7 years
Average Bull "height" 507.1%
Average Bear duration: 1 year and 8 months
Average Bear "depth" -36.5%
That’s not a typo – the average Bull market height over the past 100 years has been 507.1%!!! This is why long-term investors shouldn’t worry too much about Bear markets, painful though they seem when you are in the middle of one, where the average depth is only -36.5%.
Taxation Policy
Source: Daily Telegraph
"The Telegraph can reveal that a Treasury document drawn up for Rishi Sunak, the Chancellor, sets out a proposed "policy package" of tax increases and spending reductions which may have to be announced within weeks in order to "enhance credibility and boost investor confidence" in the British economy."
Income Tax
Some Options?
"All bets are off with things like manifesto pledges and triple locks. The world has changed to such a degree" (Mike Hodges Saffrey Champness)
According to HMRC a single percentage point rise in the basic rate of income tax from 20%-21% would raise £4.7bn in 2020-21.
Increasing the higher rate of tax from 40%-41% would raise circa £1bn of tax reflecting the smaller number of taxpayers in this band of earnings.
Increasing the additional rate of tax from 45%-46% would raise £105m
Possibility that the Chancellor could scale increases in tax rates, for example
1%:BRT
3% HRT
5% ART
Other Possibilities
Reduce or remove the personal allowance
Drop the level at which the personal allowance starts to be restricted to <£100,000
National Insurance Contributions (NICs)
NICs are complex and the government may take this opportunity to introduce some radical reform to "simplify" and also raise additional tax revenue.
Some options?
Remove the Upper Earnings Limit
Introduction of a flat rate
Harmonise the lower earnings limit with the personal allowance which will help lower earners but as above remove the upper earnings limit
Introduce National Insurance Contributions (NICs) for people who are working and over the state pension age.
Increase NICs for self-employed clients and a quid pro quo for the Self-Employed Income Support scheme
Self-Employed clients earning over £9,501 pay NICs at 9%. Employed individuals pay NICs at 12%
Inheritance Tax
Some Options?
Remove the flat rate of IHT of 40% and align the tax rate(s) to rates of income tax
Introduce a wholesale reform (See OTS report from July 2019) and introduce a form of Capital Transfer Tax which taxes assets whenever they are transferred (lifetime or on death).
Reform Business Relief and Agricultural Property Relief
Reform gifting (consider introducing a lifetime limit)
Remove the Main Residence Nil Rate Band
Retain the Nil Rate Band at current levels
Reform exemptions such as the "Normal expenditure out of Income"
Take another look at trust taxation
Also worth noting : HMRC’s suspension of its Inheritance Tax investigations during the coronavirus crisis gives taxpayers a unique opportunity to get their affairs in order, says Pinsent Masons, the multinational law firm. (Source: https://ifamagazine.com/article/hmrc-pause-on-inheritance-tax-investigations-gives-taxpayers-opportunity-to-get-affairs-in-order-says-lawyers/)
According to Pinsent Masons, HMRC launched 5,347 IHT investigations last year*, generating £259m in extra tax. 27,283 IHT investigations have been launched in the last five years, with a total yield of £1.3bn.
Pinsent Masons warns the suspension of tax investigations is only temporary and HMRC is likely to be more aggressive once its compliance work resumes. HMRC will be looking for ways to increase its compliance revenues to cover rising coronavirus-driven public spending.
The law firm adds that HMRC dramatically increased the number of tax investigations it opened in the aftermath of the 2008 financial crisis as it tried to close the gap in the public finances.
Capital Gains Tax
Remove or cap CGT relief on a client's "Principal Private Residence"….Cost to the exchequer £26.7bn ( according to the NAO)
Increase rates of taxation ( currently 10%/20% and for property 28%)
Align CGT rates of tax to Income Tax rates
Clear disparity between tax rates on "wealth" and tax rates on "income"
Freeze or reduce the Annual Exemption of £12,300 for individuals/£6,150 for trustees
Introduction of a Wealth Tax?
Some Options?
A one-off payment or an ongoing levy on wealth
According to the Future Economies Research Centre in Manchester a 2% one-off levy on ousehold net wealth calculated to be at circa £15tn would generate the £300bn needed to cover the cost of the Covid-19 crisis
Levy would be on property values (net of mortgages), financial assets, businesses, savings and possibly pension assets
May mean the introduction of temporary capital controls to stop individuals moving wealth overseas?
May not be called a "wealth tax" but positioned as an NHS surcharge which would apply to all Income Tax and Capital Gains Tax (say at a rate of 1%-1.5%). Possibly also NICs. Maybe tapered so that clients with higher incomes/wealth pay a higher percentage?
Perhaps this approach is an easier "sell" politically?
The above is largely speculation of course but it is an inescapable fact that the cost of this crisis will need to be met from somewhere and we are all likely to feel some pain, in one way or another.
As always, please do feel free to call me at any time to discuss anything that might be concerning you.
Stay safe everyone and have an enjoyable week.
With best regards,
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
