Our election pledges for private clients

With the general election less than a month away, it’s not yet clear what pledges and promises will be made, all eyes will be on tax policy and what they key political parties have to say on its tax position. At the time of writing political parties have yet to reveal their policies and long-term plans for the country if they were to be elected, one of the key issues that needs to be addressed is the issue of fiscal drag.

Most of the major political parties have publicly said that income tax allowances will remain frozen, and they would not look increase them until at least April 2028. According to the Office for Budget Responsibility, freezing the thresholds between 2022-23 and 2028-29 means nearly four million additional individuals will be expected to pay income tax; three million more will have moved to the higher rate, and 400,000 more onto the additional rate. It is predicted that the six-year freeze will raise £35.7 billion of tax revenue.

Although inflation is reported to be slowing, this does not reduce the higher cost of living created by the recent period of high inflation; between September 2022 and March 2023, the UK experienced seven months of double-digit inflation, which peaked at 11.1 percent in October 2022. Therefore, keeping allowances static is just increasing tax rates by a different method at a time when every penny counts.

Whoever wins the upcoming election should ensure that revisiting the issue of fiscal drag is high up on their agenda.

We have included below a list of our main pledges if we were able to address some of the key issues of unfairness in the tax system for private clients.     

1. Simplify the tax and benefit systems to help boost productivity

Many families on average earnings need to have a basic understanding not only of the UK’s tax code but also how the welfare benefits system works.

As wages increase over time, even if inflation remains static, taxpayers are being pushed into higher income tax brackets. This appears at various places in the income scale and in some cases can create a serious disincentive to work, for example shift workers taking shorter hours or refusing overtime or consultant doctors taking early retirement due to income tax charges on pension entitlements. Those on median incomes also need an eye on benefits withdrawn as earnings increase.

More tax and less benefits can reduce work incentives which make labour resourcing more difficult and in the medium term can lead to skills gaps in smaller businesses. FOMB employers see higher employment costs per job which can bring business margins under pressure.

The next government need to take a good look at this whole area and radically simplify both the tax and benefits systems.

2. Remove the Residence Nil Rate Band (RNRB) and replace with a higher Nil Rate Band (NRB)

Currently, executors of an estate can potentially claim a NRB of £325,000 plus a RNRB of £175,000 to reduce the value of the estate on which Inheritance Tax is paid. However, the RNRB can only be claimed if the deceased owned a house and left it to their children or remoter issue. No relief would be available if the deceased had no house or no children. In addition, the maximum relief is only available if the deceased’s share of the house is worth £175,000 or more.

We propose to eliminate this inherent unfairness by increasing the NRB to £500,000 and removing the RNRB. The tapering of the RNRB for estates over £2 million could be replicated for the NRB to reduce it to £325,000 for large estates.

3. Ensure cohabiting couples benefits from the same tax advantages as married couples

The marriage rate in the UK is declining. Cohabitating relationships are increasingly common but the UK tax system doesn’t provide the same advantages to those couples who choose to walk down the aisle, compared to those who don’t. As a general tax principle, a transfer of assets between married couples does not trigger an immediate tax charge. But the same transfer of assets between cohabiting couples is treated as a disposal, potentially generating a tax liability.

Furthermore, spouses who divorce still benefit from these tax advantages for up to three years after they separate, or indefinitely if the assets pass as part of formal divorce proceedings. No such protection arises where the cohabiting couple separates. Neither is there any recognition of their commitment on death as transfers to a surviving unmarried partner on death will not be exempt from inheritance tax beyond the nil rate band, as is the case for married couples.

Our manifesto would include a blanket amendment to all tax rules relating to “spouses” and extend the definition to include cohabiting couples who have lived together for at specific period of time (to match any changes to legal rights for cohabiting partners) or have children together.

4. Extend the window that new UK residents can be exempted from UK tax on foreign income and gains from 4 to 7 years

There is currently a great deal of uncertainty for non-domiciled individuals following the changes announced in the recent Budget, which is hindering proper planning. Ensuring that any new measures will not be rushed through in April 2025 (as is the current plan), would be a help resolve this. We would look to extend the window by which new UK residents, who have had 10 years consecutive non-UK tax residence, can be exempted from UK tax on foreign income and gains.

The current Government propose that this will apply for the first four years of tax residence from April 2025 in order to encourage inward investment, but we do not believe these aims will be achieved if the window is so short. A period of 7 years would have a more beneficial impact and be in line with similar regimes in some other European countries.

5. Lower the effective rate of estate tax to bring it in line with our international counterparts

We would like to see a fairer Inheritance Tax system more in line with our international counterparts and introduce a more streamlined approach to preventing double taxation on estates that better supports the UK’s international communities. Not only is the nil-rate-band too low, further complications can arise for the estates of non-UK domiciles who may be subject to estate taxes in the UK and in their country of origin or other jurisdictions. Tax treaties are very complicated, which can lengthen the time taken to complete the estate tax accounts, delaying the grant of probate.

The UK currently has one of the highest effective rates of estate tax in the world. Many of our European counterparts may have similar levels of exempt estate and top rates of tax as the UK, but in many cases, the top rates of tax in the progressive systems don’t kick in until the value of the estate is well into the €millions. Looking globally, US citizens are entitled to a federal estate tax exemption of USD 13.61 million in 2024 (which is adjusted annually for inflation).

6. Reintroduce Mortgage Interest Relief for private landlords

Since 2020/21 financing costs incurred by private landlords are disallowed in calculating rental profits and instead relieved as a basic rate tax reduction in calculating the tax position. Therefore, where there is no taxable rental profit, for example losses have been generated or profits are covered by the personal allowance, no relief is available. Any unrelieved portion of loan interest is however available to be carried forward and relieved in future years where the individual has a taxable rental profit.

This has created unfairness, together with a distortion in the rules between private landlords and companies (and landlords of Furnished Holiday Lets up to 6 April 2025) who continue to be permitted to deduct the full cost of loan interest in calculating their rental profits.

We would therefore propose to reintroduce the full deductibility of loan interest for private landlords to simplify the rules and to bring them in line with companies. This would also assist in reducing costs for private landlords and help to create a pro-growth tax environment for private landlords.

7. Re-introduce Multiple Dwellings Relief

Multiple Dwellings Relief (MDR) was a Stamp Duty Land Tax (SDLT) relief that was available when a taxpayer purchased multiple qualifying residential properties allowing SDLT rates to be applied to the average value of the properties, rather than a total purchase price. It was introduced in 2011 to reduce a barrier to investment in residential property and promote private rental sector (PRS) housing supply. A consultation was published in November 2021 to make MDR fairer and an external evaluation reported that it is not cost effective in meeting its original objectives. In the 2024 spring budget, the Chancellor announced that MDR will be abolished from 1 June 2024 (transitional rules apply).

We propose the re-introduction of MDR for investors purchasing residential properties in the private rental sector only; a property owned by a landlord and leased to a tenant. This will ensure MDR is used for its original purpose and will help to boost and promote the PRS housing supply in the UK.

8. Lower the effective rate of corporation tax and employers’ national insurance contributions to bring them in line with historic norms

In an era of stubbornly elevated interest rates and with inflation leaving us with significantly elevated costs, small and medium-sized businesses are more worried than other businesses about their own financial resilience and becoming insolvent. To help ease this additional strain on family and owner-managed businesses, we would propose to get behind businesses and lighten the load of both regulation and taxation.

The last budget significantly increased the National Minimum Wage, which meant that businesses have had to face more difficult choices in how they respond to this and any successive minimum wage increases, especially where the labour market is tight and the ability to pass costs on is highly constrained.

Tax rates impacting family and owner-managed businesses are at a historic high. Corporation Taxes at a standard rate of 25% are at a level not seen for 13 years. Employee National Insurance rates are reducing but the employer rate at 13.8% is well above the norm which in its first 22 years hovered around 10%. Dividends which used to be taxed at significantly lower rates than earned income have also been taxed more heavily to the point that the tax advantages of using a company have been eroded.

For more information on the issues raised in this article or if you have any questions, get it touch with Rebecca Durrant or your usual Crowe contact.