George Bull

Written by: George Bull

George Bull

Senior Tax Partner

Will the Conservatives steal Labour’s (tax) clothes?

Judged by its headline conclusions, the IPPR report proposing changes to the tax system is unimaginably far from the natural territory of Conservative party economics. 

Scrapping capital gains tax (CGT) reliefs, including the precious death uplift, taxing capital gains as if they were income and reforming the income tax and NIC system to produce a tax hike of up to £120bn over five years – mainly paid for by the richest 10 per cent – is not a package of proposals likely to receive a warm embrace from a 21st-century Conservative Chancellor. Add to that the possibility of a £5bn per year income tax increase paid for by the richest 20 per cent and the proposals seem to have all the airworthiness of a lead balloon.

The problem with rushing to hasty judgements is that they are, well, hasty. Thinking back to the tenure of George Osborne as Chancellor of the Exchequer, we know that he was not averse to raiding his opponents’ manifestoes for ideas which he would subsequently enact.

So which parts of the IPPR report might be interesting to the current Chancellor of the Exchequer Sajid Javid?

Unfortunately, the CGT and income tax sections of the IPPR report seem to have been written by separate teams so the presentation of conclusions is not entirely compatible. Furthermore, the IPPR has not published its supporting spreadsheets to enable independent observers to come to grips with the detail.

Nevertheless, a Conservative Chancellor will want to study the proposal to abolish NIC and to introduce a combined rate of taxation for income. While in principle this threatens pensioners with a higher tax bill, the IPPR report suggests that this can be achieved in a fiscally neutral manner while giving 80 per cent of households an increase in after-tax income. The trick seems to be to replace tax bands with a sliding scale of tax rates, a proposal which we have made in Weekly Tax Brief several times over the years. At the same time, the IPPR is proposing that the sliding scale ends with a top rate of tax of 50 per cent for incomes above £100,000. While that might at first sight be a bitter pill for high-earners, it is sugar-coated by eliminating the existing marginal income tax rate of 60 per cent on incomes between £100,000 and £125,000 which applies as the personal allowance is withdrawn.

And what about CGT rates? Memories are short. It’s easy to overlook the fact that, for 20 years until 5 April 2008, capital gains were charged at income tax rates. That regime was introduced by Conservative Chancellor Nigel Lawson and ended by Labour Chancellor Alistair Darling. Historical precedent as well as the IPPR report would therefore be on the side of a Conservative Chancellor who decided to tax capital gains at income tax rates. As we have previously observed in Weekly Tax Brief, the very generous entrepreneurs relief might also be a candidate for restriction under a Conservative Chancellor.

Latest polls of voter intentions point towards a hung Parliament so, based on the current direction of travel in Westminster, an early election might result in another coalition government. Just supposing that was another Conservative/Lib Dem coalition, Sajid Javid might conclude that taking ownership of some of the IPPR proposals might boost Conservative party standing ahead of the election, in addition to being attractive in a coalition with the Liberal Democrats whose tax thinking is not too dissimilar from aspects of the IPPR report. 

This is the bottom line: while other parties’ tax ideas will be no more than a manifesto commitment until after the next election, Sajid Javid has the opportunity to crystallise Conservative party tax policies in his autumn Budget, whenever that takes place.

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