Budget 2021 - Get set for advice
After the giveaways, higher tax takes wait in the wings
After all those delays, the Budget has finally been delivered. We now have a view of the Government’s fiscal plan for the next few years. As the dust settles, it is now time to look beyond the breaking news headlines and begin to assess how the latest announcements will affect clients in the short, medium and long term.
Beyond the period of immediate crisis, we need to brace ourselves for what happens next. The Chancellor was keen to emphasise that he has not raised personal tax rates. Instead, allowances and thresholds have been frozen. The personal allowance for income tax will be frozen from 6th April 2022 through to 5th April 2026, and the allowances and thresholds for capital gains tax, the pensions lifetime allowance and inheritance tax (IHT) will all be frozen from 6th April 2021 to 6th April 2026. The Institute for Fiscal Studies estimate that this will bring an extra 1.3 million people into the income tax system, and an extra 10% into the 40% bracket. Tax rates may not be going up, but many more people will be paying more tax. In part, it depends on whether you apply the definition of rate at a national or individual level.
Although affecting a smaller number of people, the freezing of the IHT nil rate band is certainly notable, and over the next few years is likely to become significant for many more people. The nil rate band (NRB) has already been frozen since 2009, so the latest extension to the freeze will result in the NRB having been frozen for 17 years. From 2009 to 2020, inflation averaged 2.9% per year giving a cumulative rate of 37.2%*. Meanwhile, between April 2009 and December 2020 the average house price in the UK increased by 60%**. Every year for the next five years, we can expect more families to become liable for IHT. Traditionally a tax of the wealthy that middle earners do not need to concern themselves with, it is rapidly becoming a tax that middle earners very much need to know about and understand. A reminder also that the Residence Nil-Rate Band (RNRB) will remain at £175,000 until 5th April 2026, with the threshold at which it begins to taper frozen at £2 million too (tapering to zero for single individuals who have a RNRB assessable estate exceeding £2.35m and married/civil partners where their RNRB assessable estate exceeds £2.7m).
There is still the possibility of significant reform into IHT - we are, after all, still anticipating action following the reports into IHT published by the Office of Tax Simplification and the All-Party Parliamentary Group. In the meantime, clients need to understand the impact of the freezing of thresholds on their finances now and over the next five years. It is prudent to use available allowances whilst they are still available. Of course, even a political announcement today about the next five years does not mean the next five years will pan out exactly as announced. ‘Tax Day’ on 23rd March will see the launch of a number of consultations into tax structures – but of course it is currently unclear what might change as a result and when. Given the contents and conclusion of the previous reports though, it seems likely any changes will be less favourable rather than more favourable.
Two points remain clear; firstly, the need for financial advice is greater than ever and looks set only to grow. Secondly, those with the capacity to use their available IHT allowances should do so now. Delaying planning could seriously damage what could be passed on to younger generations.