Last week the Chancellor Rishi Sunak announced that the Budget, due to take place in either late November or early December, was being postponed due to the economic uncertainty caused by the increase in cases of Covid-19. While no new date has been set for the Budget, it is now likely to be held by the end of March 2021. Crucially for the investment community, this means another six months before business taxes, including Capital Gains Tax (CGT), potentially go up.
The postponement of the Budget is useful for Rishi Sunak, giving him more time to assess the state of the economy, before setting out his plan to repair the public finances, but it is just as useful for investors. The extra four months allows them to take advantage of the current tax regime when planning their short-term investment and exit strategies.
The Chancellor has made an important political decision. Debt repayment is – for the time being at least – manageable, and aggressive tax rises will damage whatever economic recovery is underway. He’ll be disinclined to introduce sweeping tax increases across the board to address the deficit while this remains the case. However, he needs to give some red meat to the more fiscally conservative parts of the party, and that means Sunak may make a calculated decision to introduce targeted tax increases to begin the process of putting the country’s finances on a more sustainable footing.
A rise in CGT is a likely candidate. Prima facie, a rise in business taxes flies in the face of traditional Conservative neo-liberalism, but the party has painted itself into something of a corner by promising in its last manifesto not to raise personal taxes (income tax, National Insurance and VAT). The idea of abolishing the triple lock on pensions has also been stamped on by No.10, so the Chancellor’s room for manoeuvre is limited.
Capital Gains Tax
Should the Budget have gone ahead this autumn, investors would have only a very limited time period in which they could have disposed of assets without being subject to a new higher rate of CGT. While the Chancellor’s plans for CGT have not been finalised, there is the possibility rates could be increased in March so as to achieve parity with income tax bands, representing a significant increase in the tax liability for investors. Even if the Chancellor does not opt for parity with income tax bands, the likelihood is that CGT will increase. The delayed Budget has opened a window of opportunity for exits to take place ahead of the planned increase in CGT, providing considerable tax benefits to investors.
Over the longer-term, changes to CGT are also likely to have implications for carried interest payments. Currently taxed at 28%, any increase in CGT will bring tax rates for carried interest closer to income tax bands. While the timing of the Budget makes little difference to this issue, the six months in the run-up to the next Budget will afford investors the time to plan their tax affairs accordingly in line with a new higher rate of taxation.
The increase in CGT will also have an impact on individual sectors. In particular, the prospect of increasing CGT in spring 2021 could motivate a sell-off of buy-to-let assets. While the housing market remains buoyant, house prices increased by 5% in the year to September 2020 according to Nationwide, the same is not true for rents. Hamptons International forecasts rents to fall nationally 1% this year and next, with London set for even greater reductions.
The delay to any increase in CGT will mean property owners can potentially take advantage of a housing market inflated by the Stamp Duty holiday while avoiding more punitive taxes down the line. Investors, however, will have to act quickly, with many property agents reporting that they are operating at full capacity, causing a lengthening of the time it takes to complete transactions.
The postponement of the Budget has given both investors and the government time to think. With the economy having been through one of the most tumultuous periods in living memory, there is little chance of things returning to normal any time soon. But for six months, things are staying as they were (fiscally speaking at least), and investors should use this time wisely.