Week in Business: Will Reeves Launch a Massive Tax Raid on Property and Pensions?
We interrupt your summer holiday to bring you news of fresh taxes on property, pensions and inheritance. God help us all.
We know the Treasury’s favourite summer holiday activity: kite flying. Release policy ideas up into the air and see how the wind takes them.
In recent days, we’ve jumped on reports of new inheritance tax levies, new property taxes and a new raid on pension pots.
It’s a miserable case of déjà vu, I’m afraid, with the government having learned absolutely nothing from last summer’s speculation of tax hikes ahead of last autumn’s Budget. Now we’re back in the same game, but the stakes are far higher.
The government faces a disastrous situation; unable to cut spending (Labour MPs simply won’t allow it) and unable to stimulate meaningful economic growth, the only lever they have to pull in order to balance their books is the one marked ‘tax hikes.’
Of course, they pulled this lever last year and hit businesses with £20bn of additional tax, something the Chancellor has long since described as a “one off” – vowing there will never be another Budget like that.
Over the course of the following year, growth spluttered and stalled, borrowing climbed, and efforts to make modest savings in public expenditure disintegrated on contact with Labour MPs who had decided that they didn’t come to Westminster to cut spending.
So, depending upon which economic forecast or piece of analysis takes your fancy, you can bet on fresh tax rises this Autumn of between £12bn and £50bn.
And £12bn only sounds low when you put it next to £50bn – it’s still a painful squeeze, and most economists anticipate at least another £20bn raid from the Chancellor – and that’s just to keep the lights on – until she has to do it again. And again.
An urgent need for cash
The government’s urgent need for cash is leading it into some very dark places.
Let’s start with a look at property taxes, almost certainly set to be a large part of the Chancellor’s Budget.
The proposed plan is to finally grab council tax and stamp duty by the horns and reform them. In normal times, this would be cause for celebration. Council tax is woefully outdated, while stamp duty is a nasty, distorting and damaging tax on transactions.
But my concern is that the government’s need for cash is greater than its appetite for considered reform. There is no scenario in which a new property tax regime instigated by this government would yield less revenue than the current arrangements. Easing the burden on taxpayers is not the priority here; however, they dress it up.
Making major changes to council tax in particular will take time, but changes to the taxation of property at the point of purchase or sale can be announced in a Budget on a Wednesday and come into effect at midnight.
So will Reeves resist the urge to squeeze some cash out of the housing market, even as she embarks on wider reform? Enter, the mansion tax – in one form or another.
Ideas being discussed include an annual levy payable by those who live in a house worth more than half a million quid and, most alarmingly, the imposition of capital gains tax on the sale of primary residences worth more than £1.5m.
Currently, nobody pays tax on the increase in the value of their house once they sell it – unless it is their second or third home.
To impose it on the sale of a sole residence, the family home, would be a monstrous act of confiscation, with disastrous consequences for particular parts of the housing market, not least, those looking to downsize.
As the head of the Building Societies Association said yesterday: “If owners of larger homes, who might otherwise downsize, are discouraged from moving, it will make it harder for others to move up the property ladder.”
Brace for another inheritance tax raid
My arguments against this particular proposal are economic and moral. It stinks.
We should brace for a further squeeze on inheritance and gifting. Currently, you can give a total £3,000 a year without it being subject to inheritance tax, and Reeves is looking at capping the amount you give like this in your lifetime.
That £3,000 limit was set 40 years ago – if anything, it should be raised to a far higher amount – and there would be economic benefits of doing so as money would pass between generations, helping people in their 30s and 40s and stimulating the economy. But Rachel needs the money.
Now, this time last year, the Treasury allowed speculation to run riot that the tax-free pension lump sum would be slashed at the Budget. Currently, it’s possible upon retirement to take up to 25 per cent of your accumulated pension as a lump sum, up to a cap of £268,000, without paying tax on it. Ahead of last year’s Budget, the government refused to rule out slashing that cap, and as a consequence, thousands of people rushed to take money out of their pension before a possible rule change.
In the end, Reeves left pensions alone – but can she afford to do so this year? Either way, the same damaging speculation will force people to act.
There is a school of thought that all these tax rumours are designed precisely to spur a flurry of financial activity; quickly – sell the house, quickly – pass money down to the kids, quickly – pull some pension money out – but I don’t credit the government with this kind of creative thinking and if it were true it would be a dire indictment of the mess they’ve made.
Given the scale of the black hole the government now faces, it’s fair to assume that all of these areas – property, pensions and inheritance – will be taxed in new ways in a few months time, not least because Starmer and Reeves have ruled out touching the big three taxes of income tax, National Insurance and VAT. That’s a political choice, and they’re sticking to it, leaving them with very few economic choices. Leaving us facing a fresh round of tax squeezes.
It is, I’m afraid, a total mess – and it’s going to get worse.
My advice? Stay on holiday.