Capital Gains Tax, road pricing, Inheritance Tax: how might Government pay for Covid-19 support?

We look at the taxes that are most likely to rise as the Government looks at ways to pay for its 2020 spending spree.

The Government has a big hole in its budgets to fill as a result of the money spent to keep the economy afloat during the pandemic.

The economy was already in something of an uncertain state before COVID-19 struck, with the spectre of Brexit looming large, so little wonder that the Chancellor’s allies have been briefing the press that Sunak will publish a “scary” outlook for the UK economy in next week’s spending review.

The Chancellor, and the Tory party at large, have made noises about aiming to balance the books, and that means looking at ways to recoup the money spent on Coronavirus measures sooner rather than later, most likely through tweaks to the tax system.

So what could the Chancellor be considering? 

What’s off the table?

After winning the last general election, the Government's manifesto was pretty clear about certain taxes ‒ Income Tax, VAT and National Insurance ‒ being off the table for any potential increases.

Of course, the world was very different back then, but it would be a brave political move to go back on those promises, even given the extenuating circumstances.

If the chancellor wants to raise more money from our tax setup, chances are he is looking elsewhere, for now at least.

Capital Gains Tax

Capital Gains Tax has clearly been in the firing line for a while, with the Chancellor tasking the Office of Tax Simplification (OTS) with looking into how it could be improved.

It published its report earlier this month, warning that as things stand the rules are “counter-intuitive” and create “odd incentives” in some areas.

For example, it said that the disparity in rates between CGT and Income Tax could “distort” decision making and effectively push people into re-characterising their income as capital gains in order to pay less tax.

So what could be changed? The OTS suggested bringing rates more in line with Income Tax, which would effectively mean doubling them as currently, basic rate taxpayers pay just 10% CGT (except on property) while higher rate taxpayers pay 20%.

It also flagged up the annual allowance of £12,300, arguing that this could be hacked right back to just £2,000-£4,000. 

Now just because the OTS has suggested these changes, it doesn’t mean they will actually happen.

But the fact that Sunak clearly wants to review how CGT works, and his need to raise some cash, means that some form of revamp to increase CGT revenues is looking increasingly likely.

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Road pricing

The Government is making a push to attract the ‘green’ vote, announcing a host of different measures to improve the nation’s environmental credentials, and chief among them is banning the sale of new petrol and diesel cars by 2030. 

The move presents a big tax problem though, as the Treasury does very well out of motorists.

Fuel Duty ‒ the tax paid when we fill up at the pumps ‒ has been frozen for years now, but it’s still a tidy little earner, bringing in around £28 billion a year, with a further £5.7 billion on top in the form of the VAT payable on the duties, according to analysis from the Institute of Fiscal Studies.

That will disappear once we move to electric vehicles.

And then there’s vehicle excise duty, which is charged based on your car’s emission levels. Again, that’s a decent revenue stream ‒ worth £6.5 billion a year ‒ that will vanish.

The Government is well aware that it already faced a car tax problem, with the payment for the nation’s roads coming from a decreasing proportion of drivers, as the popularity of electric cars has increased.

The ban on petrol and diesel cars is only going to accelerate that, so some sort of action is going to be needed sooner rather than later.

The Government has floated the idea of road pricing, where drivers are essentially taxed based on the roads they use and the miles they do.

The Treasury has been keen to emphasise that it’s just one option that it’s looking at, but from the leaks, it seems to be under serious consideration.

We can already see an example of it in action in the form of the M6 toll road in the West Midlands, where drivers have to cough up £6.70 a day to use the road.

The fact is that the Government needs to do something about the looking tax receipt hole, and this is an idea that has been floated consistently ‒ without actually being properly introduced ‒ for decades.

Now might be the time for that to change.

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Inheritance Tax

CGT isn’t the only tax that’s been reviewed by the OTS ‒ it has also previously outlined all of the problems with Inheritance Tax.

The reality is that it’s a tax that’s all too easy to get around, as a study by Canada Life revealed last year. The firm found that the richest estates, those worth more than £10 million, end up paying an effective rate of just 10%. 

Given the rate is supposed to be 40% on the value of the estate above the nil rate threshold, currently set at £325,000, that’s a pretty farcical total and the result of the wealthiest estates making the most of the various allowances and assets that enjoy the most significant tax relief.

We have ended up with a situation where the richest pay financial advisers to ensure they pay a tiny fraction of what they should, while those with smaller estates who don’t put in years of preparation end up paying far more.

While it’s unlikely that Sunak would hike the headline rate, there are other ways he can improve the amount the Treasury brings in from Inheritance Tax, for example by tinkering with the various gift allowances.

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