Reforming taxation of wealth - a report on Liberal Democrat Conference 2018

24 Sep 2018

Meeting in Brighton for their annual autumn conference the Liberal Democrats passed two substantial tax motions covering taxation of wealth and capital, and the replacement of business rates with a land value-based levy. A number of other motions also touched on tax but did not significantly develop party tax policy. Work on corporate taxation continues. Unsurprisingly Brexit was the dominant issue of the conference.

Taxing wealth

On Tuesday morning the conference passed a motion creating new party policy around the taxation of wealth and capital, under the heading ‘Promoting a Fairer Distribution of Wealth’. Policies in the motion include turning inheritance tax into a progressive large gifts tax, taxing capital gains and dividends through the income tax system, abolishing capital gains forgiveness at death and introducing a flat rate of relief on pension contributions (see below for more detail). The party expects these reforms to raise an additional £15 billion per year (rising over time), which would be used to invest in public services, fund an ambitious programme of lifelong learning, and establish an independent ‘Citizens Wealth Fund’ to invest on behalf of the country. Proposing the motion, Lib Dem Leader in the Lords Dick Newby justified the proposals by saying they responded to a sense that the rich were not paying their fair share. There was an unsuccessful attempt to ‘refer back’ the motion for further work – the proponents were unhappy about things that they felt should have been in the motion but weren’t. A handful of votes were cast against the motion but it was carried overwhelmingly. The policies are applicable UK-wide, apart from those relating to the taxation of residential property, which are England only.

These proposals – set out in more detail in this paper – are eye-catchingly bold, and reflect a strand of current centre-left thinking not limited to the Lib Dems. As Lib Dem leader Vince Cable acknowledged when launching the plans (which he was closely involved in the development of), they bear some similarities to recent work from the Resolution Foundation and the IPPR. It is far from inconceivable that some of them could find their way into the policy agenda of a future Labour government or a coalition of some kind (or even, at a stretch, a post-Brexit Conservative government casting around for radical ideas). Different parties present the issue in different ways – the Lib Dems argue, as some Conservatives would, that action in this area is needed to ensure capitalism survives and thrives, placing it in the context of previous ‘bold reforms’ like the creation of a welfare state. But it is undeniable that wealth inequality is at the heart of debates during this conference season to an extent not seen for a long time.

Taxing income, dividends and capital gains together

At the centre of the Lib Dem proposals is the idea that the tax treatment of wealth and work should, so far as possible, be equalised, in particular by taxing capital gains and dividends through the income tax system. The separate capital gains tax-free allowance and dividend tax-free allowance would be abolished. The party argues that by making these taxable through the personal allowance, the small number of people solely dependent on capital gains or dividend income would still receive a generous tax-free allowance (which would amount to a tax cut for some). One of the justifications put forward for the policy is that currently a business owner can pay themselves via a combination of salary, capital gains and dividends and benefit from three separate tax-free allowances and varying tax rates, whereas an employee cannot.

There are refinements which mean the policy would achieve less simplification than might at first appear. In relation to capital gains, an allowance linked to inflation or a minimum “rate of return” would be introduced to ensure investors do not pay tax on purely inflationary gains, and tax on capital gains from shares would be lower to reflect corporation tax already paid. Similarly, lower tax rates on dividend income would be maintained to reflect corporation tax already paid.  Additionally, capital gains forgiveness at death would be scrapped; the party argues that this is a ‘loophole’ which encourages people to avoid tax by holding onto assets for longer than necessary.

Replacing inheritance tax

The second strand of the Lib Dem plans comes under the heading ‘Taxing transfers between the generations’ and relates to the replacement of inheritance tax with a progressive recipient-based tax covering all large transfers (including gifts) over a lifetime. Under the proposal, every individual would be given a lifetime tax-free allowance of £250,000. Transfers received beyond this allowance would be taxed in progressive bands of £250,001-£500,000 (20%), £500,001-£1 million (40%) and over £1 million (45%). Small annual gifts below a specified amount (not identified in the motion but identified as £3,000 a year by a spokesperson during the debate) would be exempt and not count towards the lifetime allowance, as would spending on a child’s education and transfers to spouses and charities. To minimise avoidance opportunities, the party says certain reliefs would be maintained but reformed by: increasing minimum ownership periods; introducing provisions to claw back relief if inherited assets are sold off too quickly; and introducing tests to ensure that property receiving relief was not acquired purely for tax purposes.

This is another major tax reform being proposed by the Lib Dems. Replacing IHT with a recipient-based levy was existing party policy but this motion and paper develop it substantially, bringing in large gifts and a lifetime allowance to produce something much closer to the current Irish system than the existing UK approach. It was not without controversy during the debate. The spousal exemption was attacked by a party member from Cambridge, who was ‘horrified’ that tax policy was being introduced that was biased to married couples. A lawyer from Sussex was concerned about the possible impact on business transfers. While the motion doesn’t directly address this area he thought it was implicit that it would affect transfers of ownership. In all probability this would not ultimately be the case, but it is indicative of the fact that, for all that the Lib Dems have done commendably rigorous work in this area, the sheer breadth of these ‘wealth tax’ proposals leaves plenty of details as yet unfilled in. There was no opposition to the central thrust of the policy during the debate, but any reform that would create a tax bill of £250,000 or more (where a child inherits its parents’ £1 million house), where there wasn’t one before, will surely face what we might euphemistically call aggressive scrutiny during an election campaign. The Lib Dems, on the other hand, firstly point out that this would only apply to a situation with a single inheritor – multiple inheritors would have multiple allowances to use; and secondly, argue that radical policies like this are anyway needed to counter what they describe as a “wealth gap [which] entrenches power and privilege”.

Pension tax relief

The ‘wealth tax’ motion also proposes reforming the current system of pension tax relief by introducing a flat rate of 25% on pension contributions and abolishing employee national insurance payments on those contributions. The aim is to boost incentives to save among lower earners while tackling what the party sees as a regressive existing system, under which 63% of tax relief goes to the top 15% of taxpayers. The party would also limit the tax-free lump sum that people can withdraw from their pension pots to £40,000 (down from 25% of the pot), which it argues would address intergenerational inequality now by reducing a substantial state subsidy to the older generation.

A flat rate of relief on pension contributions is a policy that has increasing momentum behind it, with the Resolution Foundation and the RSA among those putting it forward. Former Lib Dem pensions minister Steve Webb has been an advocate of it and it is wholly plausible that it might have found its way into the programme of a second term Conservative-Lib Dem coalition. According to The Times the current government is investigating the idea with a view to raising a net £4 billion a year for the NHS. That £4 billion estimate is based on the flat rate being 25p, as the Lib Dems propose. The Resolution Foundation have suggested a 28p rate. A parliamentary candidate in the Lib Dem conference debate said the rate should be 30%. Whatever the rate this is a idea which is not going to go away. The likelihood is that eventually a government of some stripe will be unable to resist the temptation any longer and a flat rate will come in.

Taxing residential property

Perhaps the least radical element of the wealth tax paper was that relating to taxation of domestic properties. In the short-term the party proposes introducing additional higher council tax bands to make the system more progressive. For the longer-term they will review the case for replacing council tax with a percentage-based annual property tax based on up-to-date valuations. Low-income/high property value households would be able to pay the extra tax in instalments, or upon sale of the property.  This policy applies only to England as residential property taxation is devolved.

Perhaps the most notable aspect of this policy is what is not in it. It appears to be goodbye to the ‘mansion tax’, in its originally envisaged form at least, though the new policies may preserve much of the effect, depending on the levels they are set at. Additionally, and perhaps startlingly for seasoned Lib Dem-watchers (a niche activity admittedly), there is also no mention of a local income tax (see below). Policy in this area should be considered alongside the party’s proposals for local business taxation. Speeches during debate on the latter indicated that, in due course, once land value taxation for commercial property has bedded in, the party will consider extending it to residential property too. This is what politicians call a second (or even third) term issue!

Replacing business rates

In addition to the motion on ‘wealth taxes’ the other substantial tax motion at this year’s Lib Dem conference related to taxation of business property. Believing “that business rates and non-residential stamp duty are an unacceptable burden on business and unfit for purpose in a modern economy” (as the motion begins), the party proposes replacing them with a land value tax, which they call the Commercial Landowner Levy (CLL). This would:

Be based solely on the land value of commercial sites rather than their entire capital value Be set initially at a rate of 59p per pound of land rental value (compared to 49.3p per pound for business rates currently) Have no discounts for empty and derelict premises, and councils would be allowed to tax unfinished commercial developments beyond a reasonable construction period See the current system of small business rates relief replaced with a doubled Employment Allowance (ie a further £3,000 cut in employers’ national insurance bills) Maintain existing relief for agricultural land, and protect relief for charities except in the case of private schools and private healthcare Be introduced over a four year transition period, with bills shifting gradually from a property to a land value basis and incidence moved to landlords when contracts are renewed or at rent reviews See annual revaluations of commercial land values by the Valuation Office Agency

The Lib Dem paper setting out this proposal is a serious piece of work, weighing in at 52 pages and containing both costings and a wide variety of data in support of the policy. The lead author is an entrepreneur and angel investor, Andrew Dixon, who was a founder of the Lib Dem Business & Entrepreneurs Network. Introducing the paper he called it “radical, revolutionary, overthrowing stuff”. That may be pushing it a bit, and suggestions that it would not be passed on in full by landlords to their business tenants may be overblown, but it undoubtedly would represent a significant tax reform if introduced, especially if it was eventually followed by an extension of land value taxation to residential property too, as its supporters hold out. One significant effect of the change, mentioned by a number of speakers in the debate, would be removing the disincentive to invest in buildings, plant and machinery that business rates present. The abolition of non-residential stamp duty is presented as making the commercial property market more efficient. While the Lib Dems and their predecessors have had policy in favour of land value taxation before the new paper provides what Vince Cable (in its Foreword) calls “the empirical evidence and practical details that have until now been missing.” The policy applies to England only as this area is devolved elsewhere.

Inevitably one question that will be asked is who the winners and losers are from this policy. Firstly it should be noted that the Lib Dems have costed this on the basis that, initially at least, it would be revenue negative, representing an overall tax cut of £1.4 billion, though they think it is likely to be revenue-neutral in the long-term. Thus most areas and most sectors would be winners rather than losers. Geographically the big loser would, unsurprisingly, be London. The overall tax bill for London is projected to rise by 11 per cent compared to business rates. By contrast the East Midlands would see the overall tax bill fall by 29 per cent compared to the current business rates take. (That is thought to be due to the relative importance of manufacturing there, as well as low land values.) Most other regions would see cuts of 12-20 per cent in their bills. There was some concern during the debate that some local authorities could be left out of pocket by the change but the proponents reassured councillors that a combination of central government largesse and redistribution between local authorities would avoid that. Sectorally, winners would include storage and computing firms, and manufacturers. Most surgeries, nurseries and pharmacies would also receive large tax cuts. The losers would include car parks, golf courses and firms that sell advertising rights, reflecting how much of the business rate value of these firms comes from the land rather than any value added. Retail and offices would see more or less no change in aggregate. Farms would, as indicated above, be exempt.

Corporate taxation

It had been anticipated that a paper on corporate taxation would come to this conference, as a working group – originally chaired by Vince Cable, but since his elevation to leader, by entrepreneur Tony Harris – has been developing policy in this area. However progress on the paper has been slower than anticipated so the paper has been put back to the party’s spring conference. When it does appear the paper is thought likely to contain measures to increase the tax paid by big tech firms, following recent comments from Sir Vince and others. In his main conference speech Sir Vince described Amazon and Google as ‘world class tax dodgers’, vowing that the party would ‘reform company taxation for the digital age’. Watch this space.

Income tax – national and local

Vince Cable reaffirmed the party’s policy of increasing all rates of income tax by 1p to increase funding for the NHS. This would be a ‘stepping stone’ to a dedicated ‘health and care tax’ (sometimes also called an NHS tax) which, the party said in March, might replace national insurance. Additionally, as indicated above, tax on dividends and capital gains would be wrapped into income tax with a single personal allowance.

This conference appears to mark the dropping by the Lib Dems of a policy of a local income tax, and hardly anyone noticed. While this longstanding policy had been played down by the Lib Dems over recent years it remained policy, for the longer-term at least, and the statement in the ‘wealth taxes’ motion that council tax would be replaced, if at all, by an alternative property tax, with no mention of a local income levy, appears to mean the latter is no longer part of the party’s policy portfolio.

The ‘new economy’ including R&D

A policy paper on ‘the 21st century economy’ endorsed by members at the conference contains a range of proposals for reform of business regulation, labour markets, competition law and pretty much every other aspect of the economy. While tax is not at the centre of the paper it does contain a number of tax-relevant measures. Measure to boost R&D include reviewing capital gains tax rules so as to encourage long term investment through a taper rate while increasing the rate on ordinary gains closer to income tax levels. The paper contains measures to boost employee ownership and challenge concentration of market power (including in the energy, banking and technology sectors) – including through stronger regulation of monopolies. It also contains proposals to help small business and freelancers, and to reform the apprenticeship levy (see the three paragraphs below).

Supporting small business including on MTD

Under the heading of creating new incentives for digitisation and growth by SMEs, ‘21st century economy’ paper also states the party would “Reform HMRC’s Making Tax Digital programme to create new incentives and ease the transition to quarterly reporting of VAT and other taxes.” The same section of the paper also proposes a new ‘start up allowance’ to help those starting a new business with their living costs in the crucial first weeks of their business, and proposes reform of Entrepreneur’s Relief to enable investors to retain more of their money on exit providing it is reinvested in new projects. The party argues this would “support investment in the next generation of business”. They also advocate introduction of a new productivity allowance – “allowing offset against a list of approved productivity boosting measures” and reform of capital expenditure tax relief “to ensure that licensing and subscription software can qualify for the same level of reductions.”

Freelancers and contractors

The ‘21st century economy’ paper also includes a range of proposals (now policies) drawing on – and in places building on – the recommendations of the Taylor review, including establishing a new ‘dependent contractor’ employment status in between employment and self-employment, with entitlements to basic rights such as minimum earnings levels, sick pay and holiday entitlement. The party would review the tax and national insurance status of employees, dependent contractors and freelancers to ensure fair and comparable treatment, but is not explicit about how this would be done, saying only that they would seek “to protect and enhance the take-home earnings of those on the lowest pay rates.” They would also review rules concerning pensions, “in the spirit of auto enrolment, so that those in the gig economy don’t lose out, and portability between roles is protected.”

The apprenticeship levy

The Lib Dems would reform the apprenticeship levy, noting that businesses see it as “bureaucratic, convoluted and unnecessarily restrictive.” Specifically they would expand the levy into a wider ‘Skills and Training Levy’. The cash raised would be redeemable not just for apprenticeship training, but for a wider range of high-quality training, but only when companies have proved that they have an apprenticeship programme. This aims to ensure that a wider variety of people’s upskilling needs are taken into account, not just young people at the beginning of their careers. 25 per cent of the funds raised by the levy will go into a ‘Social Mobility Fund’ targeted at areas with the greatest skill needs. Responding to concerns around SME engagement with the levy system, the party would abolish the 10 per cent ‘co-investment’ requirement for non-levy payers and simultaneously end the 10 per cent funding top-up for levy paying firms. They would also increase the percentage of funds that can be passed down the supply chain by levy payers. Once the reformed levy has proved effective in raising both the quantity and quality of training, the party would aim to raise the rate paid by the largest businesses to further boost investment in skills and training across the economy. There are also a range of other proposals to boost both the quantity and quality of apprenticeships.


A housing motion contains proposals to disincentivise over-occupation of residential property through the tax system. It states that second home owners “should always pay their fair share of local taxation for the provision of local services”. The Lib Dems propose a penal rate of 500 per cent of council tax to be levied “where homes are being deliberately bought as investment properties and left empty for long periods with a stamp duty surcharge on overseas residents purchasing such properties.” Less specifically, the party says that fiscal incentives “could help to encourage older owner occupiers to downsize their properties and should therefore be considered further.”


Lib Dems are big fans of devolution of powers to local government and city regions within England, as well as to Scotland and Wales. A policy paper endorsed on the first day of the conference commits the party to “Empowering [English] Councils over their own finances, including by ending the current capping regime, giving them enhanced powers to call on new income sources appropriate to their area which should be linked to local activities and support local services and investment, and by giving them enhanced borrowing powers, including the power to borrow to enable and deliver housing and required local infrastructure.” Another motion supports devolving more powers on economic development to cities and regions within England, “with enhanced flexibility on revenue generation”.

Brexit and the Customs Union

The conference reaffirmed the Liberal Democrat commitment to fight for an "exit from Brexit" referendum to be held once the outcome of the UK-EU negotiations is known, for the public to choose between "the deal" or Britain remaining a full member of the EU, and that the party would, unsurprisingly, campaign for Britain to remain a full and active member of the EU. The conference also backed a paper stating that we should remain within the Single Market and Customs Union “to ensure the best trading arrangements for the UK, regardless of whether or not the UK remains in the EU.”

Tackling avoidance internationally

A policy paper on ‘Britain at the Heart of a Changing World’ endorsed by the conference advocates “tackling international tax avoidance and corruption by ensuring the UK and British Overseas Territories have publicly-accessible registers of beneficial ownership of companies registered in their jurisdictions.”


A policy motion on ‘Plastic Pollution’ passed by the conference says that all retailers and businesses that produce plastics or use them for their products should have to pay a levy to contribute towards the cost of necessary recycling services and larger retailers should be subject to a ‘right of return’ for waste packaging.


An immigration and identity policy paper backed by party members at the conference contains measures to help people coming to the UK to work. These include replacing caps on work-related visas with a BEIS-led policy of identifying sectors with serious skill shortages for the economy and public sector. The party proposes replacing the tier-based system with a merit-based system and a temporary workers scheme, along the lines of Canada’s system, saying this would provide a more flexible and higher quality work permit system.