This edition of our podcast features financial planners Tim Stalkartt and Mark Pollock. They discuss the Government’s options to pay for Coronavirus and possible changes to taxes
The podcast is also available on all major podcast platforms includin Apple Podcasts, Spotify and Google Podcasts. Simply search for “The Tilney Investment Podcast” or click the below buttons.
You can use the links below to navigate to a section of the transcript.
The following is a transcript of the podcast which has been edited for clarity.
It is important to remember that investments fluctuate in value and you may not get back the amount invested. Nothing in this article is intended to constitute advice or a recommendation, and you should not take any investment decision based on its content. The opinions expressed may change without notice. If you are unsure about the suitability of an investment, or if you need advice on your specific requirements, you should seek professional financial advice.
We plan to start a conversation with a wide overview of where the Government is positioned and the likely direction of travel before considering possible changes to the big three taxes: Income, Capital Gains and Inheritance Tax, with particular consideration of possible pension changes.
Mark, we were only in the first weeks of the new Government when Covid became a reality. The Budget of 11 March was dominated by what seemed at the time to be extraordinary measures to protect the economy and it was, I believe, a £55 billion package, yet that quickly paled into insignificance. If you were the Chancellor, what would be your main priority now?
Good morning, Tim. Well, for the first time, I'm glad I'm not the Chancellor. But if I were, my focus would be centred on stimulating the economy after the demand shock.
Yes, I agree. But to me, though, that massively limits the options, Mark.
Yes. I mean, there's no doubt in our mind that the Government will do all in its power to avoid bringing in austerity measures. That's very much associated with previous governments, the old Conservatives. And we've seen through this crisis that this government appears to be making policy with an eye to the opinion polls.
Yes, I agree. So I think austerity is out. Definitely. So what does that leave then?
Well, it's quite possible that debt will be regarded in the same way as wartime debt. And with current interest rates at 0.1% and inflation at 0.5%, there is obvious logic here. But I don’t propose that we discuss that further here.
But it’s an interesting point, isn't it? You know, the UK throughout this has used wartime rhetoric in the battle against Covid. We've had: “We will fight this virus with everything we have. We are in a war against an invisible killer”, and that's just from the Health Secretary. Extraordinary language. So I'm increasingly of the view, I have to say, that that rhetoric will continue and be used to justify some potentially really radical policy changes, and that wouldn’t have been possible in normal times.
We expect to see that we must come together as a nation, and “we need to continue to finance our heroes in the NHS”. And I think, importantly, we've got to come together as a society, which will ask those who can afford it to shoulder a higher proportion of the burden. And that means, that’s our clients, Mark. And I think they're the ones who will ultimately be asked to pay the biggest share.
Again, Tim, that's very logical, but the manifesto promises that we're not to raise Income Tax, National Insurance or VAT.
Yes, I know. I think it's back to ‘unprecedented times’. Covid wasn't on the horizon when the manifesto was written. And I think legitimately, you know, the Chancellor could say, “this is a national crisis”. And equally, politically, there's over four years to go until the General Election, it’s national interest. To be honest, I don't think that manifesto restrictions will place any serious restrictions on the Chancellor.
Okay, so, with that context, let's explore the various taxes and options open to the Government. So let's start with Income Tax.
Yes, well, that's sort of continuing that theme. You know, your first comment was the central one and that is that the Chancellor's priority has to be to stimulate the economy. And we know that Income Tax is the single biggest driver of revenue for the Chancellor. But do you want to be increasing Income Tax at a time when the priorities are to stimulate the economy? What do you think?
Well, I agree. I mean, it is said that a 2p increase to a basic rate tax band would raise around £10 billion a year. But that's going to hit many working class families harder this time, including frontline workers; it’s very unpopular and likely to trigger a media backlash and, back to that point regarding policies and opinion polls, high-rate taxpayers might not be so lucky.
Yes, I agree. It's back to shouldering the burden, isn't it? And will they increase the headline rate of tax? I'm not sure. All the evidence is that when you increase a tax rate, as was evidenced when Gordon Brown increased it to 50% in 2010, actually the tax take goes down, despite improved anti-avoidance measures since that time. I just don't see it. What do you think, Mark?
Potentially another option could be looking at making alterations to the tax bands, bringing down the starting point to which the additional 45% rate applies, which is currently £150,000 or, to say a lower amount, £100,000. Similar measures were proposed in the election manifesto of Mr Corbyn, if you remember.
And it wouldn't be the first time the Government is stealing a policy from the opposition, would it? And just think about that: if you were paying 45% tax at £100,000 that would make an effective rate of tax between £100,000-125,000 when you lose your personal allowance of 67.5%. That's pretty eye watering, isn't it? Back to Denis Healey and pip-squeaking. Crikey. So, the other big area _the often forgotten tax – is National Insurance contributions. I know you've got some thoughts on this one, Mark.
Yes, well, again, it's potentially stealing another Labour Party policy which was looking at merging Income Tax and National Insurance and by doing so, effectively, laying an eye on all forms of income, including rent and pension income.
Another option could be to abolish the upper earnings limit or increase the rate at which we pay the upper earnings limit, which is currently at 2%, which was originally brought in to pay for things such as the NHS. Rishi Sunak has been quite deliberate in focusing attention on the self-employed, who pay class 2 and class 4 National Insurance and generate a lower rate than employees. When he announced his measures and relief packages for the self-employed back in March, he said it's harder to justify the inconsistent contributions of people with different employment statuses. He went on to say if we all want to benefit equally from state support, we must all pay in equally.
That sounds like a signal to me. Not a lot you can do about it though. But I think National Insurance would be pretty high on the Chancellor's list of options. Another one I think will be right up there is pensions, sadly, and we've had a lot of tinkering with pension changes over time and we’ve been having a lot of conversations with clients about this. What sort of things are you talking about?
I think there's a couple of things that are very much on the agenda. I mean, the first is that perhaps it's finally time for higher and additional rate relief on pension contributions to succumb to legislative change and move towards a flat rate that has been talked about for quite some time. That would again produce a significant and immediate tax saving for the Government.
How much is it that we estimate pension tax relief costs?
It's estimated at the present time to cost £35 billion a year. And whilst an awful lot of that has been stimulated as a result of auto-enrolment, much is still at that higher rate.
Yes. I mean, it's been blocked previously by Conservative back benches but I think the time is right. Again, back to that radical agenda, I think they could push that through now. I think the time has come. I'm with you on that one. And what about tax-free cash?
Again, a lot of questions. Perennial rumour, isn't it, but what's your thoughts on tax-free cash?
Yes, again, very much having those conversations. I'm not so sure, though. I think I feel that the tax-free cash is sacrosanct. It's the fulcrum of the pension system. And I don't believe at this time the Government will potentially look at changing that, but never say never.
Yes, I agree. I mean, legislation calls it a pension commencement lump sum, typical sort of pension rhetoric, but there's no mention of it being tax-free, but I just don't think the Government will go there. I think it would be regarded as retrospective. And the Treasury has sort of suggested that Osborne was looking to change the rules, back when he was Chancellor. But there's a third pension bit that I think the Government will seriously look at, and that's the pensions triple lock. Again, it's a manifesto promise that guarantees that the basic State pensions will grow at a minimum of 2.5% inflation or average earnings growth. With inflation of 0.5%, 2.5% feels generous, and it's really expensive, isn't it?
Yes, there are real concerns that looking forward, this is going to be unaffordable. And reports are indicating that scrapping this could save the Government's around £8 billion pounds a year.
Yes. So to sort of summarise so far then, we thought potentially Income Tax rises, but probably focused on high earners, certainly not basic rate, we don't want to be hitting those key workers; we think National Insurance, particularly for the self-employed. And on pensions: higher-rate tax relief. So it’s pretty high, pretty likely to go we think. If you're thinking about making a pension contribution and you're a higher-rate taxpayer, really think about doing something now or talking to us about doing that, there are some pretty complex rules about sweeping up from previous years and so you can pay a reasonably sizable chunk.
I think equally if the tax-free cash sum is worrying you, come and have a chat because that's an area that could go. We think it's unlikely, but never say never. And to move on, let's talk about the second big tax which is Capital Gains Tax. Now that wasn't part of the manifesto pledge and interestingly – and I've said this for a number of years –we've got a half price tax here. We've got the highest rate of Capital Gains Tax, just 20% for non-property and 28% for property. Surely that's a bit anomalous?
Yes, I agree. I think it's felt that Capital Gains Tax rates are just too low at the present time and either increasing those or aligning those rates with Income Tax and/or reducing the annual allowance would address this point, and in particular, target wealth.
Yes, I agree. So if you were Chancellor, how would you do that?
I'd probably look to signpost it as a change that's coming in from 6 April. Not only does that make it easier from an administrative point of view, but what that also does is it creates a window of stimulus for individuals that may look to sell some assets now, and that then brings in tax to the Exchequer.
Yes, I completely agree. It would actually really drive revenue today, wouldn't it? Which is what's key. Interestingly, the work I did before the election looking at Corbyn suggested it's not necessarily the right thing to do to crystallise gains straightaway, but certainly there are other times when it absolutely is. Again, really complex, but it's going to stimulate lots of thinking. Start thinking now would be my advice. Anything else on Capital Gains Tax?
Well, there's potentially another radical option that would generate substantial tax revenues and, what's more, generate them quickly, and that is to review the Capital Gains Tax exemption that applies to the sale of main residence. Very recently we've had a change whereby if you're selling property, the tax has to be paid within 30 days of the sale rather than on 31 January the following tax year. So the abolishment of the main residents’ relief could generate substantial tax money.
Do you think they’d do that?
Again, I think it's unlikely, in our opinion, a sort of further fiscal blow to the property market, which is potentially vulnerable right now. I just don't think it's the right sort of time.
Yes, we've seen how important the Government regard it. Estate agents were back in business before they could see their families. And, you know, the Englishman in his castle and all of that sort of property. When properties are going up, we're happy, aren't we? I think that one's probably too radical even for this Government. Okay, shall we move on to the third big tax which is Inheritance Tax? Again, we've been talking about this and the challenge is will the Government increase death duties in the wake of a health crisis? I'm not sure the headlines next day are really going to be something that the Government wants since, as we said, it’s very focused on the opinion polls. But I've had conversations with private client lawyers recently and they think Inheritance Tax is a really obvious area for the Government to look at. Not least because Inheritance Tax at the moment is at its most benign ever. And you've made that point as well, Mark.
Yes. I was looking back and I noticed that legacy succession duties, which was a sort of precursor to Inheritance Tax, was actually raised to 80% in the aftermath of World War Two, so back to that logic of war rhetoric and “we're all in this together”. Indeed it increased as much as 85% under Harold Wilson's government.
That's pretty scary, isn't it? And then there's a couple of papers aren’t there on tax and tax simplification.
Rather than potentially changing the headline tax rate of 40%, it's worth remembering the Government is sitting at the moment on two reports from the Office of Tax Simplification. And contained within those documents are some statistics that estates above
£10 million are paying an effective Inheritance Tax charge on death of below 10%. Now that is largely attributed to the effects of being able to claim a wide range of uncapped reliefs – business relief, agricultural property relief and, above all, the ability to make unlimited lifetime gifts, which if you then survive for seven years after the date, that gift falls out if you're charged Inheritance Tax. Rather than increasing the rules of IHT, changes to those allowances could be an alternative strategy to raise taxes and once again, target wealth.
Yes. I think it’s massively generous to give away all of your wealth, live seven years and then you pay no tax. I think that's possible and I suppose you also say, “What do I do about it?” My counsel is don’t make gifting decisions as a knee-jerk reaction. Think about it, it takes time. You need to think about philosophy and to really understand how much you need to support your lifestyle for your lifetime. And I've seen people who've given away too much too soon and are struggling to live which is not a great result. But start thinking about it. Definitely. I think it's got to be on the agenda. The other big tax I'm not sure we're going to have time to talk about is VAT and we have a couple of interesting points. I think we both have the view that if anything, VAT might fall temporarily and give people a window to buy big items. There’s been talks about perhaps increasing VAT online and decreasing it for high street. And the other interesting point is when we come out of Europe, we're then free of EU legislation around VAT, and it gives the Government a bit more flexibility to alter VAT rates between different goods and services. So certainly, the Chancellor can do some tinkering there.
So we spoke at the beginning about radical taxes. We've looked at the three big taxes. We've looked at VAT very briefly and I'm having a lot of conversations with clients about the spectre of a wealth tax. I'm sure you've been doing the same. What's your thought on a wealth tax?
Yes, it has been on the agenda and it's been in the papers as well. It stems from the fact the Office for National Statistics have assessed that the net wealth of the UK population is circa £15 trillion at the present time and unsurprisingly that's concentrated in property and pensions. So it could be very tempting for the Government to look to attach a one-off tax charge on that wealth, which given the size of it wouldn't actually need to be at a particularly high percentage in order to generate a tax-take sufficient to repay the deficit that has been created.
Yes, I agree. So how would you do that then, back in the Chancellor shoes?
Well, therein lies the difficulty because I just don't know if we've actually got the data available to charge this tax. And the evidence from around the world also suggests that where other countries have looked to impose this, there are a number of ways in which individuals can look to reduce their tax charges, the obvious one being by taking on debt, which at the present time is incredibly cheap.
Yes. That's my conclusion as well, HMRC don't know what we own so they can't charge it. And then there are potentially alternative ways of doing it, but I just don't think it's going to happen. It's been talked around for many years, but I suspect it won't happen. But I still think, back to our sort of radical theory, it’s possible. There's a precedent to a one-off, relatively short-term tax. I could foresee the Chancellor introducing a Covid tax, for example. If we look at Germany post-reunification, they introduced a solidarity tax. And again, that's inside the ‘one nation’ rhetoric. Arguably they could say, “for three years, we're going to charge this tax”, – I don’t know how they do it – and then of course after three years – we’ve got four and a bit years to an election – start reducing the tax and you've got a tax-cutting Chancellor. So the logic works. If you're going to do it, though, and do a radical tax, you have to do it now while people feel we're in a state of emergency, you're not going to wait. So that's the balance the Chancellor has to weigh up.
I agree. I think that sits quite well. It's quite timely. The Government has talked much about how the universal effect of Coronavirus has impacts on every citizen whatever their sort of demographic or earning capacity is, so potentially there is a public mood of solidarity and a blanket sort of new tax, which is quite clear and defined as to what it's paying for and for how long, would be palatable.
Yes. Should we pull those action points together then?
Yes, I agree. I think that the Government continue to find themselves in a really unenviable position as they assess the various options available to them in terms of paying for the Covid-19 crisis.
Yes, I agree. I think in much the same way they're tackling the balancing act between public health and restarting the economy. They've got further difficult balancing acts on the horizon. If I was listening to this I would think, what do I do? How do I manage my own personal finances? What can I do today to protect my situation?
Yes, I agree. It can be accepted at this stage that there are more questions than answers and what we've been discussing here today contains much speculation. Whilst we must wait for the next Budget and the further clarity that that brings about – whether that's in the traditional Autumn Statement or an emergency Budget – there are a number of points that clients should be giving thought to now, particularly in terms of bringing forward actions that they are already considering, providing that they make sound investment and fiscal sense to do so.
Yes. And just summarising those: firstly, making pension contributions now to obtain higher rate tax relief, rebalancing the portfolio now to dispose of unwanted assets at current Capital Gains Tax rates and allowances –particularly if there's a capital expenditure on the horizon – bringing forward lifetime gifts, and then, finally, if you're running your own business and have distributable reserves, then consider making an interim dividend at current Income Tax rates.
Yes, I should also say that the arrival of this pandemic and the global impact it has had and continues to have is really a ‘once in a generation’ event and in the same way as other life-changing events that we deal with for clients – marriage, divorce, retirement, death of spouse – it's a trigger point. It should really mean and act as a prompt for clients to seek clarity, reassurance and advice from us in terms of whether they are on track to achieve their objectives, and to review how their finances are positioned in terms of a defence against some of the future legislative changes in tax rises, and other measures that we've discussed today. And whilst we are working at home, we can continue to fulfil that holistic advice and interactive financial planning with our clients in a live environment across mediums such as Zoom and Microsoft Teams.
Yes, indeed. And it is absolutely about protecting the situation and planning for the future, with the importance of keeping future options open, that sort of thing that we're doing day in, day out. I think it's been highlighted that with crisis comes opportunity, but also risk. So it’s absolutely the right time to review matters.
Yes, if we're led to believe anything is on the table, then should we see that flurry of fiscal changes from this government in the months and years ahead, it's going to radically alter the tax landscape. And therefore access to quality financial advice is going to prove vital in managing those changes. For me, in short, our role in this crisis for our clients is to provide another form of support bubble.
Yes, you're right. It’s the current phrase, isn't it? But that's entirely our role: support bubble. We’re obviously delighted to be talking to friends, family, colleagues at this time to help them to get their financial affairs in order. So please do get in touch. I trust you found some of this of interest. Hopefully you haven't panicked too much. Mark, thanks ever so much for your thoughts today.
If you have any feedback about the podcast or ideas for future episodes, we would love to hear from you. You can get in touch by emailing firstname.lastname@example.org or calling us on 020 3811 3625.