Parliament returns to rumours of VAT, inheritance and property tax changes

A change of personnel

The UK has a new tax minister. Previous Exchequer Secretary James Murray was promoted on Monday (1 September) to Chief Secretary to the Treasury to replace Darren Jones, who has been appointed to a newly created role of Chief Secretary to the Prime Minister, responsible for helping to deliver the Prime Minister's priorities. His replacement is Dan Tomlinson, MP for Chipping Barnet since last year.

Tomlinson is an economist who has worked at the Treasury, Resolution Foundation and Joseph Rowntree Foundation. In the year since he was elected Tomlinson has most made a mark on the issue of housing (an area of interest he has in common with his predecessor who was formerly London’s Deputy Mayor for Housing). He has been described as among the “most vociferous housing campaigners from the new intake” of Labour MPs – and is part of the Labour Growth Group. The Labour Yimby group welcomed his appointment and called him “the perfect man for the job”.

Elsewhere the issue of Angela Rayner’s tax affairs, which led to her resignation on Friday (5 September), is notable from a tax policy perspective for the spotlight it has shone on the complexity of the tax system in general and stamp duty land tax (SDLT) in particular. With property taxes under discussion more generally (see below) it will be interesting to see if it prompts any efforts to try to simplify this area as opposed to just looking for potential additional sources of revenue.

The Budget: Coming back for more?

MPs may have been away from Westminster over the summer but there has been no let-up in the rumours about what might or might not be in this autumn’s Budget, with speculation growing that the party will have to raise taxes further despite previous protestations to the contrary.

Sluggish economic growth, Trump tariffs, and policy choices such as the decision to reinstate winter fuel payments and reverse welfare cuts have conspired to lead Chancellor Rachel Reeves to warn of “trade-offs” ahead of the Budget. Despite the Chancellor’s bullish comments last November that ministers would not be “coming back with more tax increases”, it is now widely believed that both Reeves and the Prime Minister are “preparing the ground” for more tax rises.

Think-tanks too have warned of the scale of the challenge facing the government, with some policy shops, such as the National Institute for Economic and Social Research, claiming that “moderate but sustained” tax rises will be needed to counter an expected budget deficit it has calculated will sit near the £40 billion mark.

Others, such as Capital Economics, predict a lower gap (around £20 billion) but still see possible breaches of the government’s tax promises and a need to “pull one of the big tax levers like VAT, income tax or employee National Insurance” to dig the government out of its budget black hole.

Ministers have been hitting the airwaves in recent months to insist the party will stick steadfastly to its pre-election mantra to not increase rates of income tax, National Insurance or VAT. But while their election-winning pledge to “not increase taxes on working people” sounds clear enough, senior figures from the Prime Minister down have struggled to settle on a definition of what that means in practice. Definitions vary among ministers, with debate over whether it includes those on modest incomes, those earning six-figure salaries, or individuals with savings, landlords, or shareholders.

A widespread interpretation of the election pledge is that it relates only to rates and so does not rule out the (widely expected) extension of the freeze on income tax thresholds that is currently due to expire in 2028.

A proportional property tax?

One area that has seen a lot of speculation is property taxes. According to a report in The Guardian, Treasury officials are considering a series of options as part of what the paper describes as “a large tranche of work within the Treasury aimed at tapping into the vast cumulative rise in house prices in recent years that risks entrenching inequalities and making council tax – which is based on early 1990s property values – more unfair.”

According to the paper, SDLT could be replaced by a new tax on the sale (rather than purchase) of homes worth more than £500,000 (which the paper says would not replace SDLT for second homes). This new tax would reportedly only affect about a fifth of property sales, compared with about 60% with current levels of SDLT.  Additionally, senior ministers are said to have asked officials to study how a new “proportional” property tax (to replace council tax) could be implemented and to model its impact. Initially a potential national property tax is being considered, but officials are also studying whether, after the national tax, a local property tax could then replace council tax in the medium term.

Sources quoted by The Guardian said that Treasury officials are drawing on the findings of a report from the centre-right thinktank Onward, by former government adviser Dr Tim Leunig, which was published in August last year. That paper proposes replacing council tax and SDLT with a proportional property tax. This new tax would see homeowners - not tenants - paying a proportional tax toward local services on house values below £500,000 and a national levy on the value above. A minimum payment of £800 for any house would be set to help fund local government. The local rate would be set by councils, but an average rate of 0.44% would replace council tax income. The national rate could be 0.54% for homes between £500,000 and £1 million, and 0.81% on any value above, the thinktank suggests. Onward proposes that anyone who has already paid SDLT on their home should be exempt – so they aren’t taxed twice – until they move but they argue that, eventually, it would present a more reliable income source for the government. 

Additionally, The Times has reported that the Chancellor is considering applying national insurance to landlords’ rental income, suggesting this could raise around £2.3 billion a year. ‘Allies of Reeves’ told the paper that doing so would not break her red lines because it would involve widening the earnings which national insurance applies to, rather than raising the rate. The paper notes that a plan to impose NI on rental income was proposed last year by the Resolution Foundation, which was previously headed up by Torsten Bell, who is now a Treasury minister working with Reeves on Budget preparation.

Finally on this theme The Times has reported that the Chancellor is considering charging capital gains tax (CGT) on the sale of main homes worth £1.5 million or more, removing private residence relief from these high value properties. This would be on top of SDLT.  The paper says that: “While the threshold is the subject of live discussion in the Treasury, officials believe it could raise significant sums of money.”

Personal taxes – a cap on gifts?

Inheritance tax and capital gains tax both saw increases in last year’s Budget and could be set for further rises this autumn.

The Treasury is reported to be considering a lifetime cap on the value of gifts that someone can pass on before they die in order to reduce their eventual inheritance tax bill, according to the Telegraph. The paper suggests that the rate of taper relief (the discount you get for living at least three years after giving a gift) is also under review.

Meanwhile The Independent reports that a “well-placed source” told it this week that, in respect of the Budget: “At the moment the focus is on capital gains tax and the gambling tax.” The paper notes that trade unions are pushing for capital gains tax to be equalised with taxes on wages. It says it is unlikely the Chancellor will go that far, but it is thought she could look at increases from the current rates.

There have been suggestions too, of a reduction in the amount of money savers can put away tax-free in cash ISAs, notwithstanding reports in July that this had been put on the backburner for the time being. Meanwhile, with Torsten Bell, the Parliamentary Secretary to the Treasury and ex-head of the Resolution Foundation, now leading Budget preparations, some believe further changes to the way pensions and pension contributions are taxed could be likely. The Telegraph says Reeves is considering cutting the tax-free lump sum. Bell, the pensions minister, has previously advocated cutting this to just £40,000.

The Resolution Foundation has also been advocating for marginal capital gains tax rates for shares to be aligned with dividend tax rates and taxing property gains like wages.

Earlier in the summer, Lord Neil Kinnock, former Labour leader, joined those saying the government should introduce a wealth tax. He backed the proposal of Tax Justice UK and the Patriotic Millionaires for a 2% levy on assets worth more than £10 million, which has also inspired an Early Day Motion which has won the backing of 33 MPs, 17 of them Labour.

Kinnock’s proposal may not have been instantly dismissed by Downing Street sources, but the mood music among ministers is that they are likely to reject the plans, which the Business Secretary Jonathan Reynolds described as ‘daft’ and which some government sources have said would be unworkable. 

Business taxes – VAT and banks to be targeted?

According to the Mail, the Treasury is considering “a £2 billion tax raid on small businesses” by reducing the threshold at which small businesses and sole traders have to register for VAT. The paper does not give a level it will be reduced to but states that the idea is backed by ‘new Budget supremo’ Torsten Bell and Treasury tax chief Dan York-Smith, and notes that Bell has previously backed calls for the threshold to be cut to just £30,000. However the Telegraph reported on the same day that the Chancellor is considering raising the threshold at which businesses start paying VAT in an effort to boost growth. This counter-briefing suggests that this is a live issue being fought over by factions within the government.

Economists at Capital Economics think a hike to the bank corporation tax surcharge and a quantitative easing levy the two most likely tax rises in the Budget. The latter was called for by the Institute for Public Policy Research last month. The IPPR think it could raise up to £8 billion a year.

A leaked memo written by then Deputy Prime Minister Angela Rayner put an increase in the bank surcharge back in the spotlight back in May. Rayner suggested raising the surcharge to 5% as well as removing inheritance tax relief for AIM shares and reinstating the pensions lifetime allowance, among other revenue-raising ideas.

In August, Gordon Brown, Labour’s last Prime Minister, endorsed a proposal from the IPPR that would increase a range of gambling taxes to raise around £3 billion a year. The former Prime Minister had argued that the “undertaxed” gambling industry could foot the bill for measures including the lifting of the two-child benefit cap.  Measures proposed by the IPPR include increasing taxes on online casinos from 21 per cent to 50 per cent. As noted above The Independent has been told that the Chancellor is considering increasing taxes on this sector.

Reform UK – savings before tax cuts

As well as providing a platform for government announcements, conference season is when opposition parties get an opportunity to raise their profiles and set out their stalls to the electorate.

First off the mark this year are Reform UK, meeting in Birmingham this weekend (5-6 September), upbeat following a series of high profile defections and the gaining of a significant lead in the opinion polls. Reform’s general election manifesto included abolishing inheritance tax, cutting fuel duty by 20p per litre, and scrapping stamp duty on properties under £750,000. They also proposed tax breaks for married couples by scrapping the two-child benefit cap and introducing a transferable marriage tax allowance.

However in a pre-conference interview, the party's deputy leader, Richard Tice, suggested that the party may need to rethink its pledges, which added up to £90 billion of tax cuts at the last general election. Tice told the BBC: "A manifesto in July 2024 is not appropriate for a manifesto or contract whenever the next general election is." Tice, who has expressed an interest in becoming chancellor should Reform UK win the next election, said the party’s priorities would be making savings and cutting regulation: "I've always said you've got to make the savings and then you can afford performance-related tax cuts."

In June, party leader Nigel Farage unveiled a new tax policy for non-doms, offering them the option to pay a one-off £250,000 fee to exempt overseas income and capital gains from UK taxation. Farage has also expressed his disagreement with Lord Kinnock's suggestion to impose VAT on private healthcare and new taxes on remote gambling, which he said could harm the racing industry.

Liberal Democrats – personal allowance would be the priority

The Lib Dems meet in Bournemouth in two weeks time (20-23 September). In their election manifesto, the party pledged to crack down on tax avoidance and evasion, reform capital gains tax, and restore bank surcharge and bank levy revenues to 2016 levels.

Over the past year, the party has strongly opposed the government’s increase to employers’ national insurance contributions and urged the government to exempt various sectors including hospices and health providers from it. The Lib Dems also criticised the continuing freeze on income tax thresholds, with Treasury spokesperson Daisy Cooper saying: “It remains our priority to raise the tax-free personal allowance, as the best and fairest way of cutting tax when the public finances allow.” They also criticised the government’s inheritance tax reforms. As alternative revenue-raisers the party has suggested increasing the digital services tax, increasing remote gaming duty and making further increases to capital gains tax.

At the conference the party are set to reaffirm their commitment to replace business rates in England with a ‘Commercial Landowner Levy’. A policy motion on ‘Backing hospitality for growth and jobs’ will also propose to consult on “the creation of a new employer’s National Insurance Contributions band from £5,000 to £9,100 with a lower rate, to lower the cost of employing part–time staff.” Other motions urge SDLT rebates to encourage decarbonisation and call for the doubling of remote gaming duty.

Green Party – under new management

The Green Party will also be gathering in Bournemouth, albeit two weeks after the Lib Dems (3-5 October). As of this week the party has a new leader, following the election of London Assembly member Zack Polanski, who had a landslide victory over former co-leader Adrian Ramsay and newly elected MP Ellie Chowns, who ran together on a joint ticket.

Polanski is seeking to position the party to take on Labour from the left, promising to "take on power and wealth" in the UK and emphasising the party’s support for a wealth tax, saying that the ultra-wealthy should “pay their fair share to tackle the climate crisis”. 

Conservative Party – government should rule out further tax increases

The Official Opposition meet in Manchester from 5-8 October.

At last year’s election the Conservatives proposed a further 2% off employee NI, cutting it to 6%, abolition of class 4 (self-employed) NI and a higher income tax personal allowance for pensioners. Since then the party has focused on attacking the government over its tax increases, accusing them of choosing to “take the tax burden to a record high” and claiming that Labour is planning to deliver further tax increases in the autumn Budget. They used their Opposition Day this week to table a motion to force a vote in the Commons seeking to make the government rule out measures like a possible property tax increase before the Budget.

The party has been particularly fierce in its criticism of the government’s proposed inheritance tax increase on agricultural properties and pledged to scrap it if in government. Conservatives have also voiced concerns about Labour’s non-doms and VAT on private school policies, labelling the latter measure “destructive, disruptive and divisive”. Party leader Kemi Badenoch has called for an end to the energy profits levy and expressed support for a flat rate of income tax, though the latter is not party policy.