The main parties’ manifestos have set out their plans for inheritance tax, but after all the hype, might worries over a Jeremy Corbyn-led government prove to be unfounded?
As we reported in this blog last month, one of the top concerns for investment managers and advisers during our 2019 round of AIM Showcases was the prospect of a Corbyn-led government. At the time, one of the biggest fears in the market was the apparent plan for Labour to replace inheritance tax with a ‘lifetime gifts’ tax, which would have potentially ended the use of Business Relief at a single stroke.
And those concerns have persisted, with our current EIS Showcase series also seeing questions raised by attendees over how managers view the prospect of a Labour-led government (however remote that may seem according to the polls).
However, the launch of Labour’s manifesto last week suggests many in the market may have been worrying over nothing.
Let’s start with that inheritance tax issue. Earlier in the year, a Resolution Foundation report backed abolishing IHT altogether in favour of a ‘lifetime gifts’ allowance, with any gifts over that allowance being taxed. It was thought at the time that the Labour hierarchy was sympathetic to the idea – and certainly the likes of Corbyn and shadow Chancellor John McDonnell did little to dispel that notion.
The manifesto, though, simply talks of reversing former Chancellor George Osborne’s IHT changes (which saw the creation of the residence nil rate band, allowing couples to leave a property worth up to £1 million to their children or grandchildren completely free of IHT by 2020-21) with no reference to any plans to replace IHT (indeed, the main manifesto document doesn’t refer to ‘inheritance tax’ at all).
Reversing that cut could impact the annual pensions taper – although realistically this looks like a concept that has had its time. While the Conservatives have already announced plans to work around the taper for doctors in the coming year, Labour say they will “review the tax and pension changes implemented by the Tory government to ensure that the workforce is fairly rewarded and that services are not adversely affected”. Similarly, the Conservative manifesto pledges to review the taper, although does not commit to abolishing it.
This sounds like a direct threat to the taper, given that it has been cited as a prime reason for many highly paid clinicians refusing to take on overtime and thereby leaving the NHS with a staffing shortage. And where doctors lead, it seems likely that other services will follow.
But what about other tax-advantaged investment schemes, such as EIS and VCTs?
Labour is pledging that it would conduct “a review of corporate tax reliefs”, and as part of this, it has published a document alongside its manifesto setting out what this review would look like.
However, again this does not appear to be the radical ‘bonfire of tax breaks’ that some have feared. Instead, the document says the review would “examine the body of corporate tax reliefs for its effectiveness against their stated aims and compared with alternative policy measures to achieve these aims”.
Given that both EIS and VCT rules were reformed relatively recently – and given the evidence that can be found in our own recent EIS Industry Report on the costs versus benefits of EIS – it seems unlikely that the review would be able to argue convincingly to get rid of these types of tax reliefs.
There is a single reference to EIS, in relation to its predominance in London and the South East, but this alone may not be a good enough reason to scrap the scheme altogether.
In a different supporting document (entitled Funding Real Change), Labour talk about reforming funding for research and development. Citing an Institute for Public Policy Research ( IPPR) report that estimated between 57% and 80% of R&D tax credits are “deadweight”, Labour said it would gradually move to a system of “more direct funding”.
However, given the focus of both EIS and VCTs on ‘knowledge-intensive’ investments since the 2017 Autumn Budget, a Labour government may well recognise the benefit of keeping these systems in place as part of a wider push to invest in R&D.
Two of Labour’s headline announcements may increase money coming into tax-advantaged investments. First, the manifesto pledges to increase income tax for those earning above £80,000, although details remain sketchy on this as it simply says they will pay “a little more income tax” rather than giving any indication of what the new rate might look like.
Finally, Labour’s manifesto also sets out plans for a new approach to capital gains tax. This would see capital gains taxed at the same rate as income tax, while the lower income tax rate for dividend income would be abolished. Furthermore, Labour proposes to “equalise the tax treatment of income from dividends with other income by charging marginal rates equal to those in our income tax policy as well as – as with capital gains tax – removing the separate allowance subject to a de minimis threshold as with capital gains tax”.
Assuming the rules around VCTs, EIS and BR remain intact, these changes to income tax and capital gains tax would no doubt increase these schemes’ popularity, with higher earners more likely to look to reduce the impact of the changes on their wealth.
Of course, this manifesto would not prevent an incoming Labour government deciding to make more sweeping and radical changes than is suggested. But it does indicate that a Corbyn-led government may be willing to allow tax-advantaged investments – which have proven successful in funnelling money into the UK’s small businesses and start-ups – to continue their support of the UK economy.
More positively, the Conservatives state in their manifesto that both EIS and SEIS have been “spectacularly successful” and they would continue in the next parliament under a Tory government.
However, their manifesto has nothing at all to say on inheritance tax, despite Chancellor Sajid Javid’s hints earlier this year that they would look to cut the tax. Meanwhile, they promise “not to raise the rates of income tax, National Insurance or VAT”. Although no timeline is put on this freeze, it is assumed this would be for the entirety of the next parliament.
Ironically, perhaps, it is the party from the opposite end of the political spectrum to Labour that appears to be most threatening the tax-advantaged market. Nigel Farage’s Brexit Party has said it would abolish inheritance tax – something that would have huge implications for the Business Relief space – with no plans to replace it in any way, simply saying that it “raises less than 1% of total tax revenue”.