The New Conservative Tax Agenda - a vote winner?

Conference speeches by Shadow Chancellors are not always very newsworthy events, but today's speeech by George Osborne was a notable exception. After all, if rumours of an impending election are true, he could be Chancellor of the Exchequer in a few weeks' time. So what are my reactions, as a tax professional, to his proposals, and much more importantly, how might they play with the voters?

There are 3 main headline-grabbing proposals, as follows:

1. Increase in the inheritance tax ("IHT") threshold to £1,000,000

Those who have read my previous entries about IHT will know that I am not particularly sympathetic to the complaints of the majority of those who pay IHT. This does not boil down to the view of a former senior partner of mine, who would start any IHT planning meeting with one of his clients by saying "I don't know why you are so bothered, you will be dead!".

Rather it reflects the fact that, in the majority of cases, the assets acquired by the beneficiaries of the deceased are an addition to their existing wealth, and in this respect the tax liability causes no genuine hardship. After all, the beneficiaries of a deceased estate find themselves richer to the tune of £300,000 plus 60% of the balance of the estate, which is a rather more positive way of looking at the experience of inheriting wealth.

There are of course genuine hard cases. Most notably, adult children who live at home with parents, or couples neither married nor in a civil partnership who have been co-habiting. Businesses as a general rule qualify for 100% IHT relief, so fewer hard cases tend to arise in that arena. I am all in favour of targeted reliefs to protect people in one of the above categories, but the proposed increase in the nil rate band goes much wider than that, and indeed benefits all alike without particular regard to circumstances. Given that the vast majority of the UK population does not fall within the existing IHT net, the change therefore benefits a small minority of the population, and in general the most prosperous part at that.

Thus I have serious doubts as to how effective a vote winner this is. Certainly it appears to do nothing, or possibly less than nothing, to establish a wider appeal for the Conservative party across the electorate as a whole.

2. Stamp duty land tax exemption for first time buyers on house purchases up to £250,000

On the face of it measures to help first-time buyers get onto the property ladder must be a good thing. Particularly in areas where there is a lot of buy-to-let activity, or where people have a tendency to buy second homes, anything that weights the market in favour of the first-time buyer looks like a good idea to me.

If I have a concern it is that the one-off nature of the relief may encourage first-time buyers to stretch to buy themselves a property they can barely afford, rather than gradually working their way up the property ladder, but perhaps the tighter lending conditions that appear to have followed the Northern Rock crisis will put a check on this. It also creates an interesting marginal rate of stamp duty land tax for first time buyers buying property at £250,000 or above; anyone careless enough to buy for £250,000 as opposed to £249,999 would find themselves paying a marginal rate of SDLT of 7,500%, which is mind-bogglingly high.

This, though, I do see as a vote winner, and on balance a sensible proposal.

3. Non-UK domicile levy

As I understand it, the proposal is that anyone not domiciled in the UK can buy themselves the right not to pay UK tax on non-UK income and gains for £25,000 per year. I suspect Mr Osborne will not thank me for putting it that way, but I believe my summary is accurate. So those who earn millions outside the UK can pay a tiny fraction of that income to avoid tax on the rest, whilst those with more modest non-UK income will effectively be obliged to pay UK tax on it all by the prohibitive cost of buying exemption.

I think this is absolutely disgraceful. It does emphasise very clearly the point that both government and opposition are concerned that the mega-rich non-UK domiciles who live here will flee the country if any serious steps are taken to tax their non-UK income, and that their response (or lack of it in the case of the government) is conditioned by that concern. So what amounts to small change for the richer UK resident non-domiciled community prevents the more modestly-endowed from taking what is currently legitimate advantage of their non-domiciled status.

I think if this is presented in its true light it will be anything but a vote winner (it certainly doesn't deserve to win any votes) but my fear is that it will be presented simplistically to appeal to some of our rather baser instincts regarding those originating beyond these shores.

Thus I am not convinced overall by the proposals put forward by Mr Osborne. On the basis that the Conservative party needs to appeal to a much broader section of society in order to win any election, major changes that appear to benefit the few rather than the many seem fundamentally flawed in that respect. This clearly applies to the proposed inheritance tax and domicile changes, although I suspect they may be presented for public consumption very differently. Thus I not only have reservations about the proposed changes from a technical tax perspective, but also from an electoral perspective. The real tragedy about this is that there are fundamental flaws and inequities in the current tax system that need to be addressed, but these proposals do not appear to me to achieve that objective.

Mark Simpson

Tax Planning Director

Comments

[Rob Artisan]

Mark,

I agree that the proposals lack substance except for stamp duty but how many people will delve in to find out.

Not sure about your views on inheritance tax though, I think this is a vote winner.

Rob