Chancellor Rishi Sunak’s July 2020 “Mini Budget”

Chancellor Rishi Sunak presented his so-called “mini-budget” to Parliament on 8th July 2020 in response to the extraordinary demands being placed on the British economy as a result of the Coronavirus pandemic.

The mini-budget is in itself a bold response to the Coronavirus crisis and seems to indicate an effective end to austerity and an increase in government spending on a scale never before seen from a Conservative government. It is intended to tide the economy over until the comprehensive budget due to be presented in Autumn 2020.

What are the highlights of the mini budget?

The budget is calibrated to the immediate and urgent needs brought about by the Coronavirus pandemic. Measures introduced by the budget include:

Employment

• A Job Retention Bonus of £1,000 payable to employers who bring back employees from furlough and retain them in employment until the end of January 2021;
• £1bn for the Department for Work and Pensions to assist jobseekers;
• £2bn ‘kickstart’ scheme where the government will subsidise the wages of 16-24 year olds employed on six month work placement contracts;
• Further cash incentives for companies to take on trainees or apprentices.

Hospitality industry

• VAT reduced from 20% to 5% on food, accommodation and attractions until 12th January 2021;
• A voucher scheme for up to £10 per person giving 50% off meals (in participating restaurants) for the month of August 2020;

Property market

• The threshold for Stamp duty, in England has been raised to £500,000 (from £125,000) until 31st March 2021;
• £3bn green investment package to improve the energy efficiency of homes and public buildings.

The property market

The property market is the traditional bellwether of the British economy. The entire market came to a virtual standstill when Britain entered lockdown. There have been signs of recovery from May 2020, as the more stringent aspects of the lockdown began to ease, but some insiders view this more as a short-term spike due to pent up demand during lockdown. The long-term goal for the industry is a measured and sustained recovery and it seems like the Chancellor’s decision to raise the threshold on Stamp Duty may achieve just that.

In the Chancellor’s own words, “We need people to be feeling confident: confident to buy, sell, renovate, move and improve. That will drive growth, that will create jobs”.

The raise in the threshold is considerable and clearly the Chancellor hopes that this will boost investors’ confidence to put their money in to the property market.

The benefit of the Stamp Duty reduction has been extended to buy-to-let investors which has led to concerns that they could squeeze first time buyers out of the market by driving up prices. The second home surcharge remains in place.

Capital Gains Tax – changes coming soon?

The raising of the stamp duty threshold and the reduction in VAT, even for a limited time, will cost the fiscus in the region of £7.9 billion. The raft of other packages needed to keep the economy afloat will cost further billions. Those funds are derived from two familiar sources:

• Government borrowing;
• Taxes

Borrowing

There are rumours that the budget deficit could hit £350 billion in 2020. Some experts are of the view that in a country like modern Britain which has low interest rates, low inflation and is in control of its currency the sensible approach is to borrow money though the issue of bonds.

Quantitative easing is a monetary policy which dovetails with the issue of bonds in a low interest rate environment. This would increase the money supply thereby encouraging further lending and investment.

Taxes

Another school of thought holds that extensive borrowing is not the answer. It would be prudent and in the long-term best interests of the economy to fund the increase by raising taxes. The money must come from somewhere and, as dryly noted by the Financial Times, “Any chancellor with a hole in his pocket would try to raise capital gains tax”.

Capital Gains Tax

This does appear to be the thinking behind the Chancellor’s decision to commission a review from the Office of Tax Simplification (OTS) of Capital Gains Tax (CGT) with specific directions to assess:

• The overall scope of the tax;
• The rates levied;
• Whether the known technical and administrative issues with CGT can be simplified.

CGT receipts have been increasing steadily year on year with the total receipts for 2018/2019 amounting to approximately £9.2 billion.

How does CGT work at the moment?

CGT is levied on gains (i.e. profits) which accrue to the taxpayer from the sale of assets. These assets can include profits from the sale of shares, second homes or antiques valued over £6,000. The rate of CGT is dependent on an individual’s income and the type of asset sold. Basic-rate taxpayers pay 10% tax on capital gains, and higher and additional rate taxpayers pay 20%. The only exception is for the sale of second properties, including buy-to-let investments. Capital gains on these investments are taxed at 18% for basic rate taxpayers, or 28% for higher and additional rate taxpayers.

What would the CGT changes look like?

It is impossible to know what OTS is likely to recommend to the Chancellor when it concludes its review in October 2020. The most any of us can do at this stage is to speculate on the areas that could be adjusted in the subsequent budget. The last major reforms to CGT were introduced in 2008 by the then chancellor Alistair Darling in response to the economic meltdown that was the credit crunch. There are a few areas that have been the focus of debate amongst economist and in the financial press which, it is said, may result in one of more of the following:

• Increase in the base rate to, possibly, its pre-2008 level (28 per cent for all assets and not just residential property);
• Rates to be more closely aligned with income tax rates;
• The exemption on primary homes replaced with a threshold system similar to that which operates in respect of stamp duty (the approximate cost of this exemption is £26.7 billion per year)
• The rules around the gifting of business assets could be tightened;
• The exemption that operates when a taxpayer dies could be scrapped.

Conclusion

The challenges faced by the British economy will require a great deal of ingenuity from the Chancellor to overcome. It is impossible to state with any certainty what the future will hold or how it will affect the British taxpayer. We will continue to monitor the situation closely in order to provide up to the minute advice and guidance in these extraordinary financial times.

This article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you require specific legal advice on any issue relating to your tax affairs, we at Key Business Consultants LLP will be able to assist. Please contact us on +44 (0)20 3728 2848 to arrange a consultation.