Watch out – the Treasury plans to rake in billions more from the death tax
Don’t say I didn’t warn you. Philip Hammond’s pre-Brexit Budget was predictably fireworkfree. Even the surprise cut to income tax through the increased personal allowance isn’t all that sparkling when you factor in the accompanying rise to National Insurance contributions (NICs) tucked away by Mr Hammond in the small print (see page 4).
But we are used to Budgets that hide the devil in the detail. This time around, rather more troubling was what wasn’t said at all – in particular, the Chancellor’s silence on pension relief and inheritance tax reform.
Despite being widely anticipated, cuts to tax relief on pension contributions failed to materialise. That’s good news for now. But there was no reassurance that this will last. Since this was also a Budget that committed to huge spending increases and the “end of austerity”, it would be foolhardy to trust that current pensions relief will escape attention for long.
After Mr Hammond’s highspending Budget, the Institute for Fiscal Studies, a think tank, warned that tax rises remained “inevitable” and that there was a one in three chance that the public finances would “deteriorate significantly” next year. In that context, pension tax relief continues to be a big, red, flashing target just waiting to be hit. Political calculation may extend the stay of execution a while longer, but it is prudent to make use of the generous pension reliefs while you can.
Wealthy pensioners were also the only group to get the full value of the income tax cut thanks to their exemption from NICs. Don’t be surprised if pressure grows for ending that tax break as well.
Inheritance tax is an even more pressing topic. A review from the Office of Tax Simplification on this hated levy is due to report before the end of the year. And there is plenty of room for improvement. The threshold at which IHT must be paid has been frozen at £325,000 since 2009, almost 10 years ago. But at the same time there have been rumours of possible cuts to valuable reliefs, notably the ability to pass on shares quoted on the Aim market free of IHT.
This week’s Budget documents offered little grounds for hope. The Treasury is already rubbing its hands in anticipation of year after year of bumper IHT receipts. The 2017-18 figure was released in April and it was record breaking. Up £400m on the previous year, it weighed in at an astonishing £5.2bn. Now the projections in the Budget for 2018-19 expect the IHT take to soar again, to £5.5bn. The Treasury then expects receipts to grow by between 3.5pc and 6pc a year for at least the next five years, reaching £6.9bn by 2023-24: an increase of a third on the record receipts of 2017-18.
We shall soon know what reforms are recommended to simplify IHT, but as the Chancellor has used this Budget to open wide the public purse strings, don’t count on fewer of us paying the death tax any time soon.
The Chancellor promised to cut income tax – but there was a catch