Could these personal finance reforms win the next election?

8 June 2023

What personal finance policy reforms could the Tories put forward to drum up election support? Rachael Griffin, tax and financial planning expert at Quilter, sets out five personal finance policies the Tories could use in a bid to win favour.

Prime Minister Rishi Sunak is rumoured to be planning a significant 2p cut to National Insurance or income tax before the next general election, and it’s likely that the Chancellor has a few more vote-winning tricks up his sleeve too.

With the next general election to be held by 23 January 2025, and 2nd May 2024 being touted as a likely date, the current Conservative government has less than one year left to drum up support after the Labour party gained momentum following the local elections.

The changes to pensions savings and childcare provisions announced at the spring budget showed both the Prime Minister and the Chancellor already had one eye firmly on next year’s election, with at least one more fiscal event anticipated before votes are cast.

1 – Overhaul inheritance tax (IHT) thresholds and tax rate

While the IHT tax take has grown in recent years, it remains a tax that is universally disliked and would represent a crowd-pleasing policy to reform. Proponents of abolishing IHT laud the move as a triumph for the spirit of meritocracy, pointing to the idea that someone might have built up their wealth throughout their lifetime, paid taxes on that income and therefore should be able to rest easy that their wealth will help generations to come. Abolishing the tax could also help turbo charge wealth creation and therefore the economy.

Given Hunt has raked in a record £7.1bn in the 2022/23 tax year, getting rid of it altogether could punch a hole in the budget compounding an already bleak economic outlook. However, the tax also serves as a tool for wealth redistribution, so abolishing or reducing IHT could contribute to wealth inequality, which is already a significant issue in the UK.

Revising the threshold and cutting the 40% rate might therefore be an easier pill to swallow for politicians. Reducing the rate could keep revenue flowing while softening the blow on wealth creators. Likewise, raising the threshold would exempt more estates from the tax, providing relief to middle-class families who often find themselves in the IHT’s crosshairs.

There are also aspects of inheritance tax that are ripe for simplification. The residence nil rate band, which reduces the amount of IHT paid when passing on a main residence, is complex and poorly understood. A far simpler approach would be to scrap it as a separate allowance and roll it into the nil-rate band. The nil-rate band could also be increased in line with inflation, which would see it rise to almost £484,000 instead of its current level of £325,000 which has been frozen since 2009.

What’s more, between intricate rules on who is considered a family member, the downsizing provision and the possibility of using it on second homes, the RNRB relief remains a puzzle for those navigating inheritance tax. The government should consider removing the complex ‘conditions’ surrounding IHT, and the RNRB in particular, to reflect modern society and prevent unmarried couples being punished by the current rules.”

2 – Make gifts to first time buyers exempt from IHT

Alongside an IHT overhaul, a more radical and innovative idea to help people mitigate IHT while also supporting the younger generations in taking their first steps onto the property ladder would be to make gifts to first time buyers for use as a deposit on a home immediately outside of the donor’s estate for inheritance tax purposes.

The annual gifting allowance which enables individuals to gift up to £3,000 per tax year without them being added to the value of their estate has remained stagnant at this level since 1981. Given the average first time buyer deposit now sits at a huge £62,470 according to Halifax, the current gifting allowance is simply not sufficient for those parents and grandparents looking to support the younger generations of their family in buying their first home.

First time buyers are faced with significant hurdles, and the past few years of inflated house prices coupled with rising mortgage rates have left buying a first home unaffordable for many. A change such as this could appeal to younger voters desperate to become homeowners, while also allowing a significant amount of wealth to cascade down the generations.

Should the government not wish to remove the cap on gifting entirely then an additional contribution limit for the Lifetime ISA, for example £10,000 a year, that parents and grandparents could pay towards could be implemented as an extension of the current gifting allowance. This would boost LISA savings and would allow parents and grandparents to pivot from contributing towards a Junior ISA to the Lifetime ISA IHT free, with the added security of knowing the money will be used towards the purchase of a first home.”

3. Hold off on state pension changes and recommit to the triple lock

Earlier this year it was announced that the rise in state pension age to 68 had been delayed, and while the move was pinned on a fall in life expectancy the general consensus was that the government wanted to remove a key pressure point as it nears election season. However, at the time many called for the change to be scrapped entirely and felt that a delay alone did not go far enough. The state pension is a real area of contention for government and scrapping the rise altogether, or at the very least recommitting to the original 2044-46 plan, could drum up considerable support.

In addition, the state pension triple lock was upheld this year and saw a 10.1% uplift in pensioners’ incomes. The withdrawal of the promise for the 2022/23 tax year caused widespread uproar, and while it would be a costly move the government may look to recommit to its promise for a further year or more to gain the support of older voters who could benefit significantly given the current rate of inflation.

However, the triple lock has been a symbol of intergenerational tension in recent years, and this was exacerbated by the government’s toing and froing on the matter. Pensioners this year received a seismic inflation matching boost while younger people’s wages were not rising at anywhere near that rate. Recommitting to the triple lock would likely play to the Conservative’s older vote but could risk deterring younger voters, so the party will need to tread carefully and ensure it provides enough balance.

4. Resolve the irrational way Child Benefit works and re-evaluate childcare vouchers

The expansion of free childcare was one of the key changes made by the government at the spring budget, but it failed to address the desperate need for support for parents with young children now, as well as the glaring issues in the way child benefit is assessed.

The government’s free childcare offering will not be in place in its entirety until September 2025, leaving many families still facing a significant financial burden. While in an ideal world this support would be made available sooner, the government could in the meantime re-evaluate the childcare vouchers system as making this work better would take a significant degree of strain off parents.

Some perverse and unfair elements are also in place when it comes to how much child benefit people receive. It is wrong that at present a couple both earning £49,999 will have no reduction in their child benefit but a single parent earning over £50,000 will start to lose part of the payment. This penalises single parents who already have significant struggles to contend with without the government making it even harder.

What’s more, child benefit is not means tested and if one earner in a family makes more than £50,000 a year they must pay back 1% of the child benefit they receive for every £100 over the threshold. However, a basic rate taxpayer can earn £50,270 before falling into the higher rate band, meaning basic rate taxpayers are currently in scope for a tax charge aimed at higher earners. Wage growth has pushed salaries up in response to significant inflation in the past few years, so many people even on higher salaries do not feel richer in real terms.

The government needs to go much further here. It is simply not good enough that basic rate taxpayers can end up paying a ‘higher earner’ penalty on child benefit. If it had moved in line with inflation, the £50,000 threshold set in 2013 would be over £65,000 today. A government commitment to increasing and inflation-proofing the threshold would curry favour with millions of UK families. Otherwise, the government is benefiting from an unfair and complex system that catches out many ordinary hard-working families.

5. Simplify individual savings accounts (ISAs) and reform the LISA

A simple concept at inception, the individual savings account has been a victim of its own success and has become a muddled landscape that the Tories could look to fix. There are too many versions, each with their own unique set of rules, leaving savers confused as to where the best place is for their money. While there have previously been calls for government to scrap the entire regime and replace it with an ‘everything ISA’, this would need careful thought to ensure that savers aren’t disadvantaged, but the principle of one set of guidelines for savers to understand has merit. Getting back to the ISA regime’s simple roots would help to maintain its brand as a useful way to save tax free and could help encourage those new to saving and investing to take their first steps.

Lifetime ISAs in particular need to be reformed. The LISA attempts to fix two polar opposite problems; saving for a house and saving for retirement and fails to do either adequately, with even its name not alluding properly to either of its main purposes. Furthermore, they are treated like an ISA for a means test assessment for Universal Credit, yet they carry an early withdrawal charge like a pension. It is a worst of both worlds.

LISAs add unnecessary complexity to the retirement space, not least because the age you can access a LISA doesn’t marry up with the normal minimum pension age of 55 for other pension products, which is soon rising to 57. Comparatively, the 25% bonus is attractive and could continue to be an excellent way for the Tories to give ‘generation rent’ a helping hand onto the property ladder, but the punitive 25% penalty means that those who have done the right thing by saving are penalised if they need to access their cash. Given the current economic climate this might be more likely, particularly for younger people.

In a bid to simplify the current offering and appeal to the younger generations, the Tories could at the very least adjust the rules to only take away the bonus rather than raid people’s savings as well. This could easily be achieved by dropping the 25% penalty to 20% essentially ridding the product of an exit charge levied on people’s actual savings and could encourage more people to save. Additionally, the LISA could be renamed and made explicitly to do with housing so that people can easily understand its purpose.

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