29 January 2021
The idea before Brexit of turning the UK into a low-tax planning hub has been put on hold for several reasons, including COVID-19. This can be important in order to use current tax rates or tax planning schemes.
The following are just a flavour of what we can expect in taxes in 2021.
Potential Corporation tax hike
Any prospects of the UK becoming a European version of the low-tax trade hub seem finally changed as the Chancellor prepares for his March budget. A corporation tax rise – rather than a swash-buckling cut from the current 19% – looks possible as the government edges to towards repairing its pandemic-shattered finances.
Previous experience with aggressive rate cuts (from 26% to 19%) did not attract significant new large investments. Therefore, we should expect an increase of tax rates. There will be possibly a small rise from 19 to 21%.
Aggressive tax planning is still limited
The Brexit Trade and Cooperation Agreement will tie the UK up from aggressive tax incentives for fear of retaliatory EU tariffs. Many tax avoidance and anti-money laundering restrictions were imposed by the Trade and Cooperation Agreement on UK tax policies to secure a goods tariff-free deal, including:
The UK will instead remain signed-up to OECD measures;
The EU can use retaliation tariff mechanisms within the Agreement should UK the give unfair tax subsidies to individual companies or sectors.
For example, the EU could impose anti-money laundering obligations if the new UK free port schemes after Brexit are suspicious enough. We also draw attention to the non-regression clause in on EU country-by-country reporting standards, aimed at ensuring transparency for multinational companies that use cross-border tax rules to obtain unfair benefits.
Besides it, rules, known as Disclosable Arrangements (DAC 6), which are directed against aggressive tax avoidance across EU member states, are not weakened as a result of leaving the EU. However, due to Brexit there are amendments to the regulations .
Changes in Capital Gains Tax
The Office of Tax Simplification (OTS) review of CGT suggested four key changes for 2021 year.
Firstly, changes involve aligning rates of CGT to income tax levels and also cutting the annual gains allowance from £12,300 to £2,000 per person (however with fewer assets attracting the charge). Such decrease of the annual allowance would mean more people would pay CGT. At the same time, the aligning the rates would mean that the charge for taxpayers with an additional rate will be more than double, namely, to 45% from the current 20% the charge;
Secondly, changes involve restricting Business Asset Disposal Relief. This relief allows business owners selling up to pay a reduced rate of 10% on the first £1m of gains. The changes may include an increase in the minimum interest rate up to 25%;
Thirdly, changes involve removing the CGT uplift on death. The changes may lead to certain situations where no inheritance tax (IHT) or CGT is paid on inherited assets. If the CGT uplift is removed same assets could potentially be assessed for both CGT and IHT.
Therefore, the Office of Tax Simplification paper could lead to the end for employee shares schemes (cause it recommends that gains should be taxed as income rather than capital). It could be also worth selling or gifting assets now to benefit from higher annual allowances and/or lower rates of CGT ahead of any rises.
Changes to tax relief on pension contributions
Changes might be made to tax relief on pension contributions. Potentially relief will be limited to 20% because HMRC has stated that it would like all defined contribution pensions to move to a relief at source method to benefit the low paid.
Under the above-mentioned system, pension contributions are taken from net pay. Therefore, the pension provider automatically claims back basic rate relief and adds it to taxpayer’s pot. Taxpayers with higher and additional rate have to apply for the extra relief they are entitled to through their tax return.
Therefore, it could be also worth make pensions contributions this tax year.
DTA and withholding taxes
After Brexit UK companies may not to rely on the Parent Subsidiary Directive and the Interest and Royalties Directive to reduce withholding taxes on payment or receipt of dividends, interest or royalties from entities created in the EU. The UK has a double tax treaty with each of the EU countries.
Although some UK treaties with European countries will apply to eliminate withholding taxes, most of them will permit withholding albeit at a reduced level compared with the domestic rate; some UK treaties with EU countries require that dividends received by a UK company must be “subject to tax” in the UK in order for exemption or reduced rate of withholding to apply.
On this stage, most dividends received by UK entities are normally exempt from UK corporation tax legislation and so a treaty that requires a recipient of a dividend to be “subject to tax” in order to qualify for a reduced rate of withholding will not apply. However, UK legislation allows UK entities to elect not to benefit from the exemption from corporation tax for dividends received. It can be proved beneficial for British entities to elect to pay tax on dividends received from companies established in some EU states in order to benefit from treaty rates of withholding.
Inheritance tax changes
Changes may lead to changes of the thresholds for nil rate and residence relief, or cut what the taxpayer can give away during your lifetime. Any value the taxpayer gives away is treated as a potentially exempt transfer, therefore if the taxpayer survives for seven years it is then fully exempt. Lifetime gifting might be curtailed with a fixed £30,000 lifetime exemption and anything above that incurring a lifetime inheritance tax charge.
Also the changes could affect the use of Agricultural Property Relief and Business Property Relief as applied to Aim shares. These rules could be tightened up, so that Aim and EIS investors no longer get an IHT exemption after two years.
Therefore, it could be also worth make lifetime gifts or consider about different trust scheme.
Potential other tax rates changes
According to the Institute for Fiscal Studies (IFS), if the UK government added one percentage point to VAT rate, income tax rate and National Insurance contributions, this will help meet the £ 19 billion budget. However, these changes will most likely not be accepted.
For further information on any of the points above contact
Mikita Makayou at mikita@lexefiscal.com, or
Dr. Frank at clifford.frank@lexefiscal.com.