Jeremy Hunt has spent a good deal of 2023 stressing that tax cuts are ‘virtually impossible’, despite calls from many in his party to take steps to relieve a tax burden that has escalated to the highest levels in decades.
Hunt has argued that the public finances won’t allow it, and that any fiscal injection risks derailing the Government’s priority of bringing down inflation.
Public finance projections from the Office for Budget Responsibility have made grim reading this year but evidence has emerged in recent weeks that the Chancellor may have more fiscal headroom than was envisaged at the time of the Spring Budget.
It has been estimated that the amount of money he can spend and still hit his target of reducing debt within five years, is now £13billion or twice the Spring forecast of £6.5billion.
Evelyn Partners’ Head of Tax Sian Steele says: “If the estimates are correct, the Chancellor still can’t afford a pre-Election bonanza, but it could open the door to some targeted yet crowd-pleasing tax cuts, with the possibility of something more ambitious at the Spring Budget or in the manifesto.
With an election looming and the Tories flagging in the polls, there is pressure on Hunt to boost morale and win back some voters.
“Given this, it would be odd if the Chancellor did nothing of note and sat on his hands until the Spring Budget. With that in mind, some of the policy speculation floated in the press over the last few months, around inheritance tax and stamp duty land tax for instance, could have legs.
“To confuse matters headline tax rates are not traditionally altered at the Autumn Statement although the boundaries with the Spring Budget have become blurred in recent years, and if a measure is deemed urgent enough, it seems likely it will be announced when it suits the Government.
“Whatever happens though, households will be subject to yet more uncertainty as a future change of Government could undo anything that Hunt announces in a couple of weeks’ time, and it’s difficult to make firm financial plans amid a shifting tax landscape.”
Hunt seems very unlikely to cut income tax, to the chagrin of many in his party. The tax-raising effects of frozen thresholds have perhaps still not been fully appreciated by the public: the long-term suppression of the personal allowance and the higher rate threshold will by the time it plays out be equivalent to a 3.5p hike in the headline tax rates for middle-earners, according to one estimate.
The highest earners meanwhile have seen the additional rate threshold fall to £125,140, and thanks to the withdrawal of the personal allowance are subject to a marginal tax rate of 60% from incomes of £100,000 up to that mark.
Steele says: “There has been a limited amount of speculation that Hunt could alleviate the tax squeeze on middle-earners by relenting on the allowances freeze and raising the higher-rate threshold from £50,270, where it has stood since a negligible increase in April 2021 and is due to remain until 2028.
“This freeze will draw at least 2.1million more earners into paying higher rate tax at 40%, but it is earning billions for the Treasury, and with the current inflationary risk it seems unlikely that Hunt will take such an unexpected step in the Autumn Statement.
“But if public finances and the inflation outlook improve significantly by the time of the Spring Budget… who knows?”
Most people can currently leave an estate up to the value of £325,000 without paying Inheritance Tax, which is typically levied at the headline rate of 40%. That nil-rate band has been frozen since April 2009 and would now stand at £489,700 had it risen with inflation.
An estate may also benefit from an extra £175,000 residential nil-rate band allowance (also frozen since 2020/21) if the main residential property is passed on to direct descendants, i.e. children or grandchildren. However, the RNRB is tapered down for estates worth more than £2 million.
Steele says: “The nuclear option of abolishing IHT, which has been reported as under consideration in Government, would certainly grab some headlines, but seems more likely as a manifesto promise than a rabbit out of the Autumn Statement hat.
“Most speculation has centered around a cut to the rate, and in terms of raising the threshold, it has also been suggested that the RNRB could be folded into the main NRB to give a total IHT-free allowance of £500,000 – which would be simpler and benefit those without direct descendants or estates over £2million.
“There is no doubt that IHT is very unpopular, and whatever the arguments around equity, it can feel like a penalty on prudence and on saving for one’s family.
“Although relatively few estates pay IHT, more modest households are being drawn into its reach every year thanks to the 14-year deep freeze of the NRB as property and other asset prices have risen – a trend that is likely to continue if all is left unaltered. It is also arguable that, at 40%, the headline rate for those estates that do pay the tax is quite high.
“It is thought a move on IHT would generate some positive publicity, please many Tory backbenchers and possibly win back some wavering voters – all at relatively little expense to the Treasury, with total IHT receipts for 2022/23 coming to about £7.1billion.
“Finally, it’s worth noting that while this might be seen as a possible tax giveaway to appease older and wealthier voters, it is actually the possibly-not-so-wealthy children and grandchildren of today’s retired savers who would benefit – as it is the beneficiaries of an estate who pay the IHT bill.”
Stamp Duty land tax
Stamp Duty Land Tax is charged at 5% between £250,001 and £925,000, starts at £425,000 for first-time buyers, and rises to 12% for properties exceeding £1.5million. It raises £14-15billion a year for the Treasury, compared to just £3.68 billion in 2000/01.
Steele says: “SDLT has in recent history been one of a number of fiscal drag cash cows for the Treasury, with receipts growing substantially year on year as UK property prices soared over the long term. The perception that it has become a rather effective ‘stealth tax’ has made it quite unpopular among both potential and actual homebuyers.
“But it has also come under increasing criticism for congesting some parts of the property market, as a disincentive towards downsizing for older homeowners, and even damaging UK business by restricting labour mobility. A dearth of family homes on the market is making it less possible and more expensive for younger buyers looking at in-demand areas to move into larger properties.
“Many retirees, instead of downsizing, resort to equity release and lifetime mortgages but such loans can become unexpectedly expensive and burdensome, and in some cases leave a nasty surprise for the beneficiaries of an estate.
“The notion that SDLT acts as a drag on moving at this and other rungs on the property ladder has propelled it into Autumn Statement speculation. Reports suggest that the Conservatives are looking at some sort of further stamp duty relief or reduction, which as with IHT could be a popular but relatively inexpensive move.
“SDLT reliefs and holidays – such as the raising of the threshold to £500,000 for all buyers during the Covid crisis in 2020/21 – are relatively easily implemented, although they do cause angst for those caught on the wrong side of deadlines.
“An often-aired criticism of SDLT holidays is that they will inflate house prices and negate any benefits for buyers, but this could be overplayed. Analysis from HMRC itself earlier this year suggested that while relief from the tax might boost property transactions, the effect on prices could be very muted.”
There has been some noise in recent years that a more radical approach of stamp duty being borne on disposal rather than acquisition of a property would both incentivise downsizing and boost new buyers entering the market, but this may be too long in the implementation to give the incumbent Government the pre-election boost it seeks.
It has also been reported that Hunt could link stamp duty relief or rebates for first-time buyers to green home improvements made post-purchase, and it’s thought he will extend the Help to Buy mortgage guarantee scheme to help more first-time buyers borrow with a 5% deposit. The scheme was extended for 12 months to finish in December 2023, but may continue for another year.
State pension triple lock
The ever-contentious system by which the state pension is guaranteed to rise by whichever is highest of 2.5%, average earnings growth or consumer prices inflation, has landed the Treasury – and the Government – in increasingly warm water.
This year’s bumper 10.1% state pension hike added £11 billion to spending on the state pension in 2023–24, according to the IFS, and the 8.5% hike now pencilled in for April means it will cost the Treasury £2billion more in 2024/25 than the OBR forecast at the Spring Budget.
Steele says: “Since average earnings growth for the May to July quarter came in so high, at 8.5% including bonuses, there has been speculation that the Government would adjust down the prescribed rise for April to the excluding-bonuses rate of 7.8%, to save some money for the Treasury.
“While this would inevitably lead to accusations of ‘watering down’ the triple lock, it is arguably quite a sensible alteration. The surprise is more that successive governments have allowed bonuses to be included in the calculation, as they are volatile and something that only a small proportion of the working population benefit from – and this year’s figure was particularly distorted by a one-off NHS deal.
“This would have been an obvious and relatively uncontroversial reform to the triple lock had the authorities implemented it even just earlier this year, when it was already clear that costs to the Treasury from state pension increases were escalating rapidly. But now the dialogue over the triple lock has become charged by election politics, any reduction in the current slated increase will doubtless be a matter of controversy.”
Pensions lifetime allowance abolition
The surprise scrapping of the pensions Lifetime Allowance in the Spring Budget was widely welcomed as removing a tax trap that penalised savers for amassing large pots, which could fall foul of the threshold through investment growth as well as contributions.
Despite this headline-grabbing move, the highest earners still face significant restrictions on building up their pension due to the tapered annual allowance which limits contributions to their pot to as little as £10k per annum – and which means the lifting of the LTA ceiling will have done little to help them provide for their retirement.
While legislation to clarify the rules and officially abolish the LTA is due before the start of the next tax year, it seems time is running out to settle some important grey areas.
Steele says: “There could be an acknowledgement that some important aspects of this transformation in the taxation of pension savings need clarifying. A major complication is the consultation on applying income tax to an inherited pension if the saver dies before age 75 and the pot is taken as income as opposed to a lump sum.
“This is causing a lot of uncertainty and such a ‘death tax’ could distort how beneficiaries use inherited pots, and might undo a lot of the much-needed simplification of pensions taxation that the abolition of the LTA promised.”