by Kirsty Nelson, Trainee Solicitor
Given the political upheaval surrounding the latest general election, it is perhaps unsurprising that many voters will be less focused on tax reform, and more concerned about Brexit. However, the UK political parties have very different stances on tax reform and the ways in which revenue is raised. Such policies will take priority once the dust from Brexit settles and the government is required to deal with the national fallout from the past three years.
With the third UK general election in the past five years fast approaching, we look at the tax policies pledged by the main UK parties in the lead-up to the hotly contested election, with a focus on the position in both Scotland and England.
Income tax and national insurance
During his leadership campaign, Boris Johnson proposed raising the income tax threshold for higher rate earners in England. The policy faced backlash, with many doubting the party’s ability to fund the proposal. The Conservatives published their manifesto last week, and many were surprised to see the party backtrack on many policies announced during the lead-up to the election, including raising the income tax threshold. Instead, the Conservatives announced a ‘triple tax lock’, meaning that income tax, national insurance contributions and VAT (the three largest taxes, which account for two thirds of the total tax revenue each year) will not be increased. This tactic is risky – if a need for public spending arises, it may be most appropriate to raise one of these taxes.
In a bid to appeal to low-income voters, the Conservatives did confirm that they plan to raise the starting point at which employees/the self-employed begin to pay national insurance contributions from £8,632 to £9,500 in their first budget, and eventually to £12,500. The Institute for Fiscal Studies (IFS) said that implementing an increase to £12,500 would cost £6bn and would only benefit workers by £2 per week.
Labour’s pledge is to reduce the higher rate threshold of 45% from £150,000pa to £80,000pa, and to introduce a new rate of 50% for income over £125,000pa, while freezing rates for lower earners. The IFS has warned that the UK is heavily dependent on higher earners as a source of tax income and such earners may seek to lower their pre-tax income to reduce their tax burden under Labour’s scheme.
The Liberal Democrats are hoping to increase all rates of income tax by 1p and eventually replace national insurance with a dedicated ‘health and care tax’. In a bid to crack down on tax avoidance, the Green Party has pledged to merge income tax, national insurance, inheritance tax, capital gains tax and dividend tax into the consolidated income tax, treating all income the same for tax purposes.
The above applies specifically to England. The Scottish rates of income tax are decided by the Scottish Parliament, therefore any changes to current rates will be dependent on the Westminster government’s spending decisions. The Scottish budget announcement was originally planned for 12 December, and has now been postponed so that the general election can take place. Consequently, it appears that the Scottish budget announcement (along with any income tax changes) will now be postponed until after Christmas.
Inheritance tax (IHT)
At the Conservative Party conference in October, Sajid Javid announced that the Conservatives were considering the abolition of inheritance tax. This was a very popular policy throughout the party, and indeed the country, with a 2015 YouGov poll showing that almost 60% of people consider IHT to be unfair. The policy is absent from their manifesto – most likely due to the vast cost of abolishing IHT.
Labour and the Liberal Democrats initially proposed more radical plans for inheritance tax. Both suggested scrapping the current system and replacing it with a lifetime gifts tax, levied on the recipient of gifts. Under these plans, once a recipient exceeded their lifetime allowance (£125,000 for Labour and £250,000 for the Liberal Democrats), most gifts would be taxed at income tax rates. However, neither party included their proposals in their manifestos. The Liberal Democrats did not mention IHT in their manifesto, and Labour only proposed scrapping the residence nil rate band (an IHT allowance for passing on a family home to direct descendants) brought in by the Conservatives in 2017. Labour also suggested that it may try to limit agricultural and business property relief, lessening their status from a full relief to a tax deferral, but this is also absent from the manifesto.
The Brexit Party has come out in favour of scrapping inheritance tax, stating that the tax generates ‘relatively little’ in revenues. This claim was disputed by many: the Treasury received £5bn last year from inheritance tax alone. UKIP shares this proposal, claiming that middle-class families are those hit hardest by the tax.
Capital gains tax (CGT)
Labour’s manifesto details its plan to tax capital gains as income in the hope of preventing people from separating their sources of income to benefit from income tax, CGT and dividend tax reliefs. Labour states that capital gains would be taxed less than income, as they are not subject to national insurance. The party claims that the policy would raise £14bn per year.
Labour continues to say that entrepreneurs’ relief is unfit for purpose and works as a ‘handout for a small number of people’. The relief currently allows qualifying persons to pay 10% on any gains arising from the sale of business assets, and Labour plans to put in place a better form of support for entrepreneurs. However, it does not plan on removing all CGT reliefs. Labour have diverged from their 2017 plans of abolishing private residence relief, which allows a person to sell their principle home without paying CGT on gains arising from the sale.
The Liberal Democrats have confirmed their commitment to their 2018 plans, whereby capital gains would be taxed as income. The tax-free allowance available on dividend income and capital gains forgiveness on death would both be abolished by the party, in an attempt to thwart tax avoidance under the current CGT rules.
It remains to be seen whose tax policies will be implemented, and indeed whether such promises are scrapped once the winning party takes office. Polling appears to favour the Conservative Party, but in this political climate, there are no absolutes and public opinion could shift dramatically.