Conservatives unveil tax-cutting manifesto but omit inheritance tax

Prime Minister Rishi Sunak has unveiled the Conservative manifesto ahead of the 4 July general election. The noteworthy finance-related pledges include:

• A state pension ‘triple lock-plus’
• No new taxes on private pensions or reduce reliefs
• Abolishing National Insurance (NI) for most of the self-employed and a further 2p cut for employees

Despite it being hotly debated just a year ago, inheritance tax wasn’t mentioned in the manifesto.

The Conservatives have rediscovered their traditional enthusiasm for cutting taxes despite presiding over a period in which the tax burden has risen quite substantially, thanks to frozen thresholds and slashed allowances.

They have promised to cut tax for ‘earners, parents and pensioners’ by slashing NI and introducing the state pension triple lock-plus, as well has boosting household finances with child benefit reforms and help for first-time buyers.

To woo older voters, the Conservatives have introduced the ‘triple lock-plus’ pledge. This is because, at £11,502 a year, the full-rate state pension is coming dangerously close to the personal income tax allowance, which is currently frozen at £12,570 per annum until 2028. Without this measure, pensioners could be taxed on their state pension income.

The Office for Budget Responsibility (OBR) has forecast that the state pension will overtake the personal allowance level by 2027, but if inflation or wage growth gives an unexpected boost to the state pension, it could happen sooner.

The triple lock plus is an ’age-related’ tax-free personal allowance in the income tax system, which would rise above the rate of the state pension. This would create two different personal allowances: one for working-age people that will be frozen until 2028 and another higher one for retirees that could change annually.

It’s an expensive pledge and has the potential to be generationally divisive. It’s not clear what sort of personal allowance would apply to those who continued to work after state pension age – and 1.37 million people aged 65 and over were still in work last year, according to the Office for National Statistics (ONS). In our view, it would add another level of complexity to the UK tax system.

There’s the danger that the triple lock might not be sustainable for many more years. The state pension could also come under fiscal pressure and if this occurs many may need to rely on a private pension or other assets and savings to make up for that.

While the Conservative manifesto contains a pledge not to raise taxes on pensions or water down their tax reliefs there’s still the worry that a cash-strapped future government could look in that direction to raise funds.

The abolition of NI for the self-employed could be a good incentive for the risk-taking and the uncertainty that is involved in running a business instead of going into employment. However, it could result in some taking advantage of this change by trying to redefine or restructure employed roles as ‘self-employment’ to pay less tax.

Together with the 4p already cut another 2p off NI would add up to a quite significant tax cut, which is calculated at £1,300 a year for the average worker by the Conservatives. Higher and additional rate taxpayers are already benefitting from a £1,508 annual boost to take-home pay from the two NI reductions that were introduced in January and April.

Reducing NI by half is a significant measure that should not be underestimated. However, if the Conservative government had time to implement this, it would - like the first two cuts – be up against a surge in overall tax levels due to frozen income tax allowances and other escalating financial pressures on households.

Reducing inheritance tax has been excluded from the Conservative manifesto after occupying a prominent part of the policy debate over the last year. It is surprising it was dropped, given Chancellor Jeremy Hunt declared only a few weeks ago that the tax is unfair and ‘profoundly anti-Conservative’.

The only inheritance tax reform on the cards now would probably be in the opposite direction. If a potential Labour government needs more tax income, raising inheritance tax could be a source, for example.

Increasing CGT is an option for a new government to turn to even if they currently have ‘no plans’ to do so. Some argue that CGT rates should be closer to or aligned with inheritance tax. Let’s not forget that the Conservatives have cut the annual capital gains exemption from £12,30 in 2022/23 to £3,000 this year.

The Liberal Democrats’ manifesto, which also came out this week, suggests CGT increases, which would see some investors pay taxation at 45% on gains above £100k. Interestingly the tiers proposed are based on the size of the gain, not the investor’s income tax band (as it is currently) - which could result in some basic rate taxpayers paying CGT at very high rates. 

The Liberal Democrat policy is tempered by a modest increase in the annual exemption to £5,000 and, more meaningfully, a proposal to reintroduce indexation, an adjustment for inflation, so that only real gains over and above an annual exemption would be subject to CGT. Indexation was used in the past but was frozen for individuals in 1998 and abolished in 2008.

High rates of CGT could threaten investment in the economy. Evelyn Partners’ research conducted in 2023, found that one in four business owners had fast-tracked plans to sell-up because they were worried about the tax and business environment after the General Election¹.

Higher CGT can act as a disincentive to invest, since the taxman will take more of the returns while the investor takes all the risk – and business investment is an area where the UK economy needs a boost.

It is also a headache for the process of investing outside of tax-wrappers such as ISAs and pensions, since routine switches from one investment to another and periodic portfolio rebalancing, will potentially clock up tax liabilities as profits are crystallised.

The Conservatives claim their £17 billion package of tax cuts are fully funded, but that assertion deserves further scrutiny.

There’s some doubt on whether the Conservatives would’ve implemented the triple lock plus had their chances of retaining power been stronger, given the significant costs associated with such a policy.

However, this does highlight how tax can be increased subtly through keeping thresholds static. The assurances from both political parties to keep major tax rates unchanged provide scant solace, considering the inevitable rise in taxes we will face because of fiscal drag.

We aim to keep all of our clients’ portfolios adaptable to any sort of change, including a new government. If you have any questions about the potential changes being made after the general election, if you should be taking action now or how to keep your finances flexible, book an initial consultation online or by calling 020 7189 2400, or speak to your usual Evelyn Partners contact.

[1] Source: Financial Times, UK voters resigned to tax rises despite Tory and Labour assurances, May 2024