Winter Newsletter 2021

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Welcome to 2021. It seems very strange to be wishing you a ‘happy new year’ at a time when so many people are still living a very limited life and are not sure what there will be to look forward to in 2021. But there is hope, and I am sure that by the time we publish our next newsletter in the Spring that many of you will have been vaccinated and will be feeling more confident about the year ahead.

This time of year is always a very busy one for us being the end of the tax year. Whilst we will have addressed many of the topics in this newsletter with you in your review, you may not have acted yet and so the newsletter is a reminder of the relevant tax efficient options.

As the next budget is a month before the end of the tax year and this could bring, or hint at, more sweeping tax changes, it makes sense to deal with any outstanding matters soon. In particular you should add as much as allowable to pensions, as the rumours surrounding limiting tax relief on contributions have been there for quite some time and the current regime is very generous. The rules are now far more complex and it is therefore important we check the allowances that you have available.

There is no doubt that the wealthy will be expected to pay a large part of the Covid bill. We expect any changes to be phased in and whilst there is still so much uncertainty hope that these will be from later in the year rather than being immediate.  The content of this newsletter provides some thoughts.

As ever I hope that you enjoy the content and above all I hope that you stay healthy and safe through the winter months and can start enjoying life again later in the year. We look forward to working with you this year and hope to welcome you back to the office when we can.

Jane Slater APFS

Managing Director

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depends upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at 4 January 2021.

No action must be taken or refrained from based on its contents alone.  Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction.  Professional advice is necessary for every case.


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Year-end Tax planning starts now…

A UK Wealth Tax

The Triple Lock Minimum wins again

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Year-end Tax planning starts now…

Autumn 2020 arrived without an Autumn Budget. To be fair, the Chancellor Rishi Sunak had already presented one 2020 Budget in March and the pandemic made forecasting for 2021/22 all but impossible. The result was that for the second year running, the Budget was deferred to the Spring. Whether Mr Sunak’s reading of the economic signs will prove any easier on 3 March 2021 is a moot point.

It is equally difficult to assess what the Chancellor might do in his second Budget. On the one hand, he will be ending the current financial year with a record-breaking government deficit of around £400bn. On the other hand, he will be wary of trying to fill the large black hole with the near inevitable tax increases until an economic recovery is well under way. It could be one of those Budgets where the bad news is announced but has a deferred start date or is, at least initially, targeted at the more affluent.

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Planning amidst the uncertainty

If second-guessing is impossible, there are nevertheless several planning areas to consider before 3 March. Waiting until nearer the end of the tax year (5 April falls on Easter Monday) could be too late:


A change in the personal tax relief on pension contributions from marginal income tax rates to a single flat rate is a regular pre-Budget rumour. That could mean a cut from a maximum rate of relief of 45% (46% in Scotland) to perhaps a flat rate of 20%-25%. Higher and additional rate taxpayers would lose out.

Depending upon where the Treasury pitched the flat rate, it could save billions while making most pension contributors, basic rate taxpayers, better off or at worst unaffected. Even without the revenue benefit, the result has a clear appeal to a government that regularly talks of ‘levelling up’.

Last year Mr Sunak increased the cost of pension tax relief by adding £90,000 to the two income thresholds that govern the tapering of the annual allowance. That could mean in 2020/21 you have an opportunity to make a higher contribution than in previous tax years. In any case, it is worth checking whether you have scope to take advantage of unused annual allowances from the past three years (back to 2017/18) at current rates of tax relief.


Plans to put a cap on ISAs were reportedly considered by the Treasury in 2013, an idea that was recently revised by the Resolution Foundation in a paper examining ways to repair public finances. As with reforming pension contribution relief, the main impact would be on those who pay tax at more than the basic rate. For most basic rate taxpayers, the combined effect of the personal savings allowance, dividend allowance and CGT annual exemption is to render ISAs of little relevance.

If you pay tax at more than the basic rate, all types of ISA offer a quartet of tax benefits:

  • Interest earned on cash or fixed interest securities is free
    of UK income tax.
  • Dividends are also free of UK income tax.
  • Capital gains are free of UK capital gains tax (CGT).
  • ISA income and gains do not have to be reported on your tax return.

In addition, if you are eligible, the Lifetime ISA (which the Resolution Foundation said should be scrapped) gives a 25% government top-up on contributions.  The overall total contribution limit for ISAs has been frozen since April 2017 at £20,000 (of which the Lifetime ISA ceiling is £4,000). However, the limit for Junior ISAs was more than doubled to £9,000 in last year’s Budget.

Capital gains tax

In July 2020, Mr Sunak asked the Office of Tax Simplification (OTS) to review CGT. The request came out of the blue but arrived at a time when increasing the CGT tax take was being discussed by several think tanks. It had also been proposed in the 2019 Election manifestos of both Labour and the Liberal Democrats. Mr Sunak would not be the first Chancellor to ‘borrow’ money-raising ideas from the Opposition.

The OTS published the first of what will be two reports on CGT reform in November. Its suggestions included:

  • ‘More closely aligning Capital Gains Tax rates with Income Tax rates’, which could mean more than a doubling of the current tax rates in some instances.
  • Reducing the level of the annual exemption from the current £12,300 to an ‘administrative de minimis’ of between £2,000 and £4,000.
  • Removing the rule which gives a capital gains tax uplift on death. As a result, if you inherited an asset its base value for CGT purposes would be that of the deceased, not the value at the date of death.

That trio of measures, which could be introduced with immediate effect on 3 March, is a good reason to review the unrealised gains in your investments as soon as possible. Although it is no longer possible to sell holdings one day and buy them back the next to crystallise capital gains, there are options which can achieve a similar effect, such as making the reinvestment via an ISA or a pension.

Inheritance tax

A report on CGT is not the only OTS document on capital taxes occupying the Chancellor’s in-tray. On taking over the job last February, he inherited a pair of reports on Inheritance Tax (IHT) which had been commissioned by Philip Hammond. These had been expected to feed through into last year’s Spring Budget. They may still do so in the forthcoming Budget, possibly alongside, and complimentary to, CGT reforms. The consequence could be a radical restructuring of capital taxation.

Ahead you should consider using the three main IHT annual exemptions:

  1. The Annual Exemption: Each tax year you can give away £3,000 free of IHT. If you do not use all of the exemption in one year, you can carry forward the unused element, but only to the following tax year, when it can only be used after that year’s exemption has been exhausted.
  2. The Small Gifts Exemption: You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 exemption.
  3. The Normal Expenditure Exemption: The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions and one most likely to be reformed. Currently, any gift is exempt from IHT provided that:

a. you make it regularly;

b. it is made out of income (including ISA income); and

c. it does not reduce your standard of living.

If you have the surplus capital available, you should also think about making large lifetime gifts. This could include gifting investments, thereby also using your CGT annual exemption. One of the OTS reform suggestions was the abolition of the normal expenditure rule and the introduction of an annual limit of IHT-free lifetime gifts.

Venture capital trusts and enterprise investment schemes

Traditionally, the first three months of the calendar year see the launch of offerings from venture capital trusts (VCTs) and enterprise investment schemes (EISs). Subject to generous limits, both offer income tax relief at 30% on fresh investment, regardless of your personal tax rate, and freedom from capital gains tax on any profits. EISs can also be used to defer capital gains tax liabilities, although this may be an unwise move given the possibility that CGT rates will rise. VCTs and EISs are high risk investments and have become more so following changes introduced from 2018/19.

A UK Wealth Tax?

In November, the Office for Budget Responsibility put the cost of dealing with the pandemic so far at £280bn, which in headline writer’s terms is £4,125 a head for each and every UK resident. By something that was far from coincidence, in December a report was published suggesting that a UK wealth tax could raise £260bn.

The status of the report

The report was published by the Wealth Tax Commission, with a foreword written by Lord Gus O’Donnell (aka GOD), former Permanent Secretary to the Treasury, Cabinet Secretary and Head of the Civil Service. The report’s main authors were three well-respected academics, one of whom is also a barrister specialising in tax. Despite the heavyweight backing and Commission title, the report had nothing to do with the government but was instead funded by a variety of research bodies, including the London School of Economics and Political Science.

Both Boris Johnson and Rishi Sunak made clear their dislike of a wealth tax when the Commission first came to the fore in the Summer. However, the cost of the pandemic has escalated rapidly since then, forcing the Chancellor into regular extensions of his expensive support schemes.

Polling consistently shows the most popular tax increases are those that affect other people – higher tax is always a good idea, provided somebody else pays. Wealth tax is a classic example but, as the Commission’s main proposals show, to raise meaningful sums requires measures that reach well beyond the multi-millionaires.

The proposals

The tax would be a one-off charge of 5% of each individual’s net wealth above £500,000. Values would be fixed on or shortly before announcement of the tax, to limit the scope for avoidance. Crucially, wealth would mean everything the individual owns, including the value of private pensions, the family home, businesses, farms and tax-favoured savings, such as ISAs.

Although a one-off tax, the Commission envisaged that most of the 8.25m wealth tax payers would opt to pay in instalments over five years – hence the many press references to the tax being 1% a year. For those with illiquid assets, such as property or private businesses, payment could be deferred but, as with the five-year option, there would be interest charged on all payments.

How much wealth tax would you pay?

The Commission stressed that the tax would not be an annual tax, which has proved difficult to administer in many countries that have tried such an option.

Will it happen?

It is difficult to imagine the current government imposing a wealth tax, not least because its impact would be heavily weighted towards London and the South East. The story could be different under a different colour of government, but with an 80 seat Conservative majority that is unlikely before 2024.

On the other hand, the wealth tax proposals do provide cover for the Chancellor to reform and increase other taxes on wealth – capital gains tax (CGT) and inheritance tax (IHT). As we mention above, there are reports on revamping both taxes from the Office of Tax Simplification in Mr Sunak’s in-tray.

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The Triple Lock Minimum wins again

In early December the Department for Work & Pensions announced the proposed increases to benefits for 2021/22. Most of the working age benefits and the earnings-linked pension benefits, such as the old State Second Pension, will rise by 0.5%, in line with annual CPI inflation to September 2020. However, the new state pension and its predecessor will both increase by five times as much. 

The Floor and the Ceiling

The costly Triple Lock

Both new and old (basic) state pensions benefit from the Triple Lock, which currently requires an increase which is the greater of:

  • Earnings growth;
  • Price inflation (as measured by the CPI); and
  • A floor of 2.5%.

For the 2021/22 increase, the 2.5% minimum was a clear winner, with earnings growth at the bottom of the trio. As the chart shows, in this context earnings growth is a misnomer; earnings fell by 1% over the year because of the impact of the pandemic.

Over the ten years to 2021/22, the 2.5% floor has been the basis for four increases, something which was probably not anticipated when the Triple Lock was announced by the coalition government in 2010. Then, as now, the Bank of England’s inflation target was 2.0%. Earnings were expected to outpace inflation by 1% or more, making the 2.5% floor a safety net that probably would only be called upon in a deep recession.

It has not worked out that way. Earnings and inflation have virtually matched each other over the period at just under 2%. In other words, there has been no increase in the buying power of average earnings over the past ten years. In contrast the Triple Lock has delivered a real terms increase of almost 11%. If you are on the receiving end of the Triple Lock, that is good news, but if you are under State Pension Age (66 now, don’t forget) it means more government expenditure you have to finance.

Looking ahead

The Triple Lock has been widely criticised by experts ranging from the Institute for Fiscal Studies to the Pensions Select Committee for being an unnecessarily expensive protection that creates intergenerational unfairness. In private politicians would generally agree but, at the last Election, all of the mainstream political parties committed to retaining the Triple Lock. The pensioner vote is not one to put at risk.

The pandemic may have changed that mindset. Last year the government introduced emergency technical legislation to ensure the Triple Lock would work in the face of zero earnings growth. However, the measures put in place only applied for a single year. There have been suggestions that, if no action is taken, an earnings bounce in 2021 as the economy recovers could mean a 5% 2022/23 increase under the Triple Lock formula at a time when inflation is below 2%. Given the dire position of public finances, such a scenario would offer Rishi Sunak the golden opportunity to justify a reworking of the Triple Lock.


Despite the new state pension’s outpacing of inflation and earnings growth, it will remain a distinctly modest sum in April 2021: a maximum of £179.60 a week. Viewed another way, that is equivalent to just over 20 hours’ work at the National Living Wage rate for 2021/22 (£8.91 an hour) or a little under one-third of current average earnings (£560 a week). No wonder the UK is likely to remain in bottom place of the OECD’s league table based on the proportion of earnings replaced by state pensions…

If you want to check your projected state pension benefit, go to

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