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Still at the behest of the pandemic

The newest coronavirus variant, Omicron, might not turn out to be a great threat to our health but it could prove a threat to economic recovery. It’s impossible to tell yet how big or small a problem it will turn out to be, but one thing the development has underlined is how far we are from dry land when it comes to escaping the clutches of the pandemic.

The sea of red that hit trading screens on more than one occasion over the past week reflects the real fears of business that 2022 might turn out to be 2020 and 2021 all over again, and the realisation that the Delta variant was not Covid playing its last card. New strains and mutations, whether harmless or dangerous, mean severe delays on the journey back to normality while scientists and pharmaceutical companies race to catch up.

We might resent the return of curbs and costly tests but the pandemic stats are grim. WHO – which isn’t convinced that the Omicron variant won’t have severe consequences – reports that globally there have been 260.9m cases of Covid-19 and 5.2m deaths. But 7.7bn doses of vaccine have been administered and the Pfizer-BioNTech, Moderna and AstraZeneca vaccines have been highly effective in preventing hospitalisation and deaths from the variants to date. 

Regardless of what we discover about Omicron in the next few weeks, and how long it takes to deliver effective vaccines against this strain, medical professionals, businesses and employers are all better prepared and we are moving closer to a world where the virus becomes an endemic rather than a pandemic problem. 

But the initial steep falls across markets and the ongoing volatility were inevitable. News of the new strain scared investors who had no hesitation paying up for richly valued shares just days and weeks before but were left staring at how far their portfolios could now fall. And it caught most investors off-guard. We are living with Covid and the new threat is inflation, right? This of course is perfectly true. We now know that pandemics are inflationary, and every extension to the pandemic increases the chances of inflation creeping higher and sticking around for longer because of disruption to supply chains and higher demand for certain goods and employees. Omicrom will encourage central banks to speed up their QE tapering and rate rises. Fed chair Jay Powell could not have been clearer when he stated this week that it is now time to retire the word “transitory” in relation to inflation. 

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It will come as a relief to many taxpayers that the chancellor has decided not to accept any of the recommendations of the Office of Tax Simplification in relation to inheritance tax (IHT). While one of the OTS proposals had included cutting the length of time donors needed to survive before potentially taxable gifts would fall outside the net of IHT, one of the key proposals was the removal of  the capital gains uplift on death even if no IHT was payable. Currently capital gains tax liabilities die with the owner of the assets and the OTS had recommended that recipients be treated as acquiring the assets at the base cost of the person who has died rather than the value at the point of death. This proposal will not be implemented

The chancellor also rejected proposals to align capital gains tax (CGT) with income tax rates and to cut the annual gains allowance albeit with fewer assets attracting the charge. But he has accepted some technical proposals such as allowing divorcing couples more time to separate their assets before CGT bites. Julia Rosenbloom, tax partner at Smith & Williamson, warns however that IHT makes an important contribution to the public finances and it would be foolish to rule out any changes in the future.