Tax carrots
The inheritance and income tax promises from party manifestos are little more than tinkering. They are only likely to complicate tax matters further, says Karl Wingfield
The inheritance and income tax promises from party manifestos are little more than tinkering. They are only likely to complicate tax matters further, says Karl Wingfield
'…in this world nothing can be said to be certain, except death and taxes.' So remarked Benjamin Franklin in 1789, in a letter about the newly created US Constitution. Not quite Benjamin. Courtesy of our political leaders, there is another certainty in life; promising voters tax changes around election time.
So what are the politicians proposing this time round for income and inheritance tax (IHT) and, does it help to simplify voters' lives and ensure consistent and fair taxation between voters or, is it all just a political expediency to try to get elected?
The main parties are all offering a significant increase in the personal allowance over the next parliament, which is encouraging. However no one's proposing that the point at which national insurance contributions become payable is aligned with the personal allowance. This would be a very welcome move to support lower paid individuals and a welcome move to towards simplifying individuals' tax affairs.
I would like to see national insurance contributions abolished; well done The Green Party for suggesting this in their manifesto. The contribution principle that originally underpinned national insurance contributions will be further eroded when the new state pension is introduced (and national insurance contributions don't fund pensions either), so it makes sense to get rid of this archaic and irrelevant tax. The reticence to do so is because other tax rates would have to rise.
I would also like to see the claw back of the personal allowance on incomes above £100,000 abolished. It's a regressive step and isn't 'fair'. If the revenue loss needs to be replaced, then surely a fairer, progressive approach would be to increase the marginal tax rate for incomes between £100,000 and £149,999. This would also remove the incentive for specific tax planning where incomes are between £100,000 and £121,200.
It's clear that income tax relief on pension contributions for the highest earners will fall post-election to pay for specific election pledges no matter who is in power. Labour's proposal to reduce tuition fees and the Conservatives' proposal to increase the main residence IHT threshold will see to this.
Whether you do or doesn't support the view that tax relief on pension contributions should be restricted to the basic rate of tax because it is fair, it doesn't inspire confidence that there won't be further tinkering with tax relief or limits on pension contributions in the future.
What confidence can anyone have in planning for retirement that the rules won't be changed in the future, at a time when it may be too late to do anything about it? It would be better if all parties developed a long term policy towards saving for pensions so that we can all plan with confidence.
One hopes that the budget announcement to review the use of deeds of variation does not happen. They are a useful tool for re-organising the distribution of an estate and not usually driven by a motivation to save tax.
The Conservatives proposal to increase the IHT threshold to £1m, for married couples and civil partners by creating a transferable main residence allowance is very attractive. But rather unhelpfully, it comes with a claw back sting for properties worth more than £2m. Is that really necessary, except to prevent the headline being the Conservatives are the party of the rich?
There are, however, anomalies and philosophical issues as to whether family homes should have preferential treatment, so there is a strong case simply to raise the £325,000 threshold for all assets.
UKIP are proposing to abolish IHT. Bearing in mind some of their other policy commitments, you do wonder how they will be able to replace the billions of pounds of IHT that will be lost.
As it's unlikely that this will survive any coalition talks, we can probably ignore it. However it's worth noting that the new pension' freedoms have created greater opportunities to avoid IHT given that they are now outside of its scope.
It will also allow individuals to dispose of assets in a structured way in their lifetimes, safe in the knowledge that they can fall back on their pension pots (and their enhanced main residence allowance) in later life. It appears to me that the Conservatives could achieve their policy objective of removing the burden of IHT, except for the very wealthiest by stealth (provided individuals are properly advised).
Not surprisingly, with the country's finances still very tight, there are no major income or IHT policy initiatives. It might be better described as tinkering around the edges, as each party pursues their vision of what a fair society is (i.e. political expediency).
Most of the proposals will complicate rather than simplify the affairs of those who are affected by the proposals. Thus one of life's certainties will continue to be so.
Karl Wingfield is director of private client at Thomson Snell and Passmore