Britain’s richest bankers and hedge fund managers should prepare now for the introduction of tax hits on their wealth to plug a hole in the country’s Covid-ravaged finances, wealth, tax and legal advisers have warned.
It comes despite the omission of a wealth tax or tax hikes on the assets owned by the UK’s richest in Chancellor Rishi Sunak’s Budget 2021 speech on 3 March.
Wealth manager London & Capital’s clients, who include hedge fund managers, have “easily doubled” their planning for possible taxes on their wealth in recent months, according to Iain Tait, the head of its private investment office.
The Office for Budget Responsibility, which tracks government spending, said on 3 March that borrowing would be £355bn in the financial year to April 2021 – the highest figure ever seen outside wartime.
Tait, who advises around 100 wealthy individuals with assets totalling around £1.25bn, said there had been “a realisation that this burden [of balancing the government’s books] will be falling further and further on the shoulders of the wealthy in the UK”.
He had seen “a continued acceleration” of clients seeking to gift assets to younger generations, he said. Such activity enables wealth individuals to lock in lower tax hits now.
Kreston Reeves, a tax and financial advisory firm, has seen enquiries from the UK’s richest triple in the weeks leading up the 3 March budget.
Client concerns centred on planning for possible hikes to capital gains tax, a levy on the profit made when assets or properties are sold, and the possibility that the government would raise or change the rules around inheritance tax, a levy that must be paid by those inheriting assets of a deceased individual. The tax typically kicks in when an estate is worth £325,000 or more.
“Clients see such possible tax hikes as a stealth tax on their accumulated wealth but we’re advising them to get ready for it,” said Stephen Metcalf, a private client tax adviser for the firm. Assets are being sold or gifted to younger generations to lock in lower tax hits now, he said.
While such changes did not feature in the 3 March budget, Sunak said the Treasury will freeze capital gains and inheritance tax thresholds rather than allow them to rise with inflation, meaning that individuals could pay more tax as their wealth increases over time. The capital gains tax threshold freeze would net the government around £30m by April 2026, according to the Treasury’s calculations.
“Freezing allowances is a back-handed way of raising taxes, as wage inflation and asset price inflation increase the number of people pushed over the thresholds at which they have to pay more tax,” said Becky O’Connor, head of pensions and savings at Interactive Investor.
She noted the chancellor avoided overtly-named wealth taxes with changes to existing allowances, which will result in higher tax bills for an increasing number of people who build up assets – whether that’s in pensions or property values, in the next five years.
“The issue coming down the line is that what hits today’s wealthy could hit normal earners and diligent investors in future decades.
“Frozen allowances and thresholds have a habit of remaining fixed for many years, dragging more people into tax charges over time. The high income child benefit tax charge threshold of £50,000 is a good example of this.”
Camilla Bishop, a partner and head of private client at city law firm DMH Stallard, said that “the big overhaul for CGT and IHT is yet to come”.
In the meantime, she said: We can still make large tax free gifts, transfer assets into trust and opt to pay the lower rate of CGT on any gains rather than suffer the death rate of 40% inheritance tax.”
Peter Goodman, a partner in the private client team at accountancy and business advisory firm Azets, welcomed the omission of a hike in capital gains tax or direct wealth tax in the 3 March announcement. However, he added: “Most of us are no doubt resigned to the fact that taxes must go up in the future”
Robert Pullen, partner at tax, accounting and business advisory firm Blick Rothenberg said: “All eyes will now be on a future Budget, possibly in the Autumn, for any increases as measures are taken to try to peg back the huge deficit.”
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