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Is now the time for tax reform?

On 3 March, Chancellor Rishi Sunak will outline the UK’s economic policy for the post-COVID era.

The 2021 Spring Budget comes at a critical time: the country may be in a lockdown, but the rollout of the Oxford-AstraZeneca and Pfizer BioNTech vaccines means we could be witnessing the beginning of the end of the pandemic. Yet, even if that proves to be the case, the Chancellor still faces the challenge of addressing public debt and ensuring the post-pandemic recovery of the economy.

The targeted financial support packages and tax relief for businesses, investors and consumers have undoubtedly been necessary, yet the resulting loss in state revenue must now be accounted for.

How the Spring Budget will make up for this loss in revenue is yet to be ascertained. However, there have been some reports that Chancellor Sunak is considering a doubling of the capital gains tax rate and a small increase to corporate tax to help balance the books.

A government spending review in November 2020 calculated that the virus had, thus far, cost the British state £284 billion. This has resulted in the highest level of state borrowing since WWII, according to the ONS.

As a result, there is a chance we could see such tax reforms being implemented on 3 March. Of particular interest to those involved in the property market is the rumoured introduction of a ”wealth tax”; a levy that could be aimed at property investors and high net worth (HNW) individuals.

Tax reforms on the horizon?

Despite recent speculation, the roots of a wealth tax affecting pre-existing real estate assets can be traced back to policy discussions that have been ongoing for years. Earlier last year, it was rumoured that the Chancellor would not be introducing a wealth tax, but instead was considering a property levy.

Based on what has been discussed, the levy would function in much the same way as a wealth tax. The total value of one’s property assets would be calculated, and those who meet a particular threshold will be charged the tax.

Of course, this is all mere speculation at the moment. HMRC has been keeping quiet in response to these reports, which means there is no telling whether such a tax would be introduced in March.

Interestingly, research commissioned by Butterfield Mortgages Limited (BML) in November last year revealed just what investors think about a potential wealth tax. Based on an independent survey of over 800 UK investors whose assets exceeded £10,000, barring their primary property, savings, pensions and SIPPS, the results provided some useful insights.

Over half (52%) of investors were opposed to the introduction of such a tax; a figure that rises to 60% among those whose portfolios are valued over £50,000.

Looking to Spring

In the years preceding the COVID-19 pandemic, the UK’s economic performance was already underperforming due to the uncertainty surrounding the UK’s departure from the EU. But now, with the UK finally out of the EU and the worst of the COVID-19 pandemic (hopefully) behind us, some say that now is the ideal time to introduce drastic changes to the UK’s taxation system.

Others, however, are unconvinced. The Institute of Chartered Accountants in England and Wales (ICAEW) is against any major tax reforms in the Spring Budget. Instead, the ICAEW is calling on Rishi Suank to deliver on his existing fiscal pledges and update the UK on the state of COVID support packages.

The Spring Budget, then, must accomplish a lot. It must encourage consumer spending and investment, continue providing support for those affected by COVID, and address the overwhelming level of public debt. Fulfilling all three of these objectives is no small feat, and it will be interesting to see whether the government believes creative tax reform will form part of the solution.