Scrapping the Lifetime and the Help to Buy Isa, limiting entrepreneurs’ relief and making pension taxation more progressive are some of the ideas proposed by Resolution Foundation for the government to save almost £7bn a year.
The think tank argued while the first three months of this year will inevitably be dominated by Brexit, the last three months of 2019 are likely to be dominated by the spending review, as the Chancellor sets out his spending priorities for the remainder of the Parliament.
One of the biggest challenges for this and future spending reviews is how to fund the rising cost of public service provision as the population ages, which is expected to increase the cost of the current welfare state by £36bn a year by 2030, and by £83bn by 2040.
Due to Brexit and a governing party without a majority, a wholesale reform of headline wealth taxes is difficult, which is why the Resolution Foundation proposes five tweaks to existing wealth taxes or subsidies.
According to the think tank, limiting entrepreneurs’ relief to its previous level of £1m, rather than the current £10m, would raise £1.6bn a year.
It said that new figures show that the cost of this policy is due to rise to £3.9bn in 2023-24, with three-quarters of the relief going to just 5,000 people.
The Resolution Foundation is proposing that Britain adopts a council tax reform similar to Scotland, which would raise £1.4bn a year.
Clamping down on inheritance tax loopholes is another proposal, with the think tank saying that freezing the inheritance tax threshold after 2020 would raise £200m a year.
Introducing a ‘farmer test’ and increasing minimum ownership periods for agricultural and business property reliefs, which together cost £1.2bn a year, would also help prevent super-rich individuals from using these reliefs to avoid paying inheritance tax and would raise £500m a year, it added.
The Resolution Foundation is also suggesting making pension taxation more progressive, by capping the tax-free lump sum at £40,000, which would raise £2bn a year.
Finally, the think tank is proposing to scrap the Lisa and Help to Buy Isa, which "are poorly targeted and absurdly expensive." This would raise £900m a year.
In July the Treasury select committee called for the abolition of the Lisa claiming it was too complex and offered "perverse incentives" inconsistent with other parts of the long-term savings landscape.
The MPs argued that there was little evidence that tax relief was an effective way of encouraging potentially vulnerable households to save for the future.
A month later HM Revenue and Customs (HMRC) published figures showing Lisa sales had failed to live up to government expectations, with 166,000 accounts opened last year - short of the 200,000 target.
According to Torsten Bell, director of the Resolution Foundation, "Britain has unfortunately got used to weak income growth but soaring wealth, which is now worth seven times the size of our economy".
He said: "It's time our tax system caught up with that fact.
"Maintaining our valued public services in the face of the big cost pressures of an ageing population, requires better wealth taxation to help fund this gap.
"Yes this is politically difficult, but the good news is that relatively large sums can be raised simply by tightening up our existing wealth taxes and subsidies.
"That is how we protect our public services without placing all the burden of taxation on hard earned income from work."
maria.espadinha@ft.com
