The shock resignation of Sajid Javid as chancellor just a few weeks before his first Budget has the future of our wallets shrouded in uncertainty.
Many will hope his replacement, the rising star Rishi Sunak, will tear up policies such as the mansion tax. But some experts are not so sure.
Tom McPhail of Hargreaves Lansdown, the investment company, speculated that Mr Javid’s background in the Treasury under George Osborne could mean he was keen to keep a tight rein on the purse strings. He said Mr Johnson’s administration was likely to increase public spending – and might resort to taxing the wealthy to pay for it.
But while some increase in public spending is welcome, Mr Sunak should heed the warning signs and pledge not to punish prudent savers, workers and investors. Here is Telegraph Money’s advice to the new Chancellor.
The rumours that Mr Johnson and Mr Javid were plotting to introduce a mansion tax – which would be the first wealth tax in Britain since 1696 – angered Conservative MPs and voters.
Sir John Redwood, Tory MP for Wokingham and a member of John Major’s cabinet, said: “[People] didn’t vote for a diluted version of Corbyn’s tax raids on the rich.”
Another Conservative MP, Nickie Aiken, said it was unfair to punish people for having seen the value of their homes grow, leaving some “asset rich and comparatively cash poor”.
Many voters did not take kindly to the plans either. Among those with a valuable home but little income is Celia Prichard, 82, who lives in a house worth about £2m in south London. It was bought in the Sixties for just £12,500, just over £200,000 in today’s prices.
She took out an equity release loan on the property to fund care for her husband, Stephen, who died 10 years ago at the age of 79. This limits her options.
“One of the reasons it [a mansion tax] would be such a blow is that my husband’s ashes are buried in the garden, so I don’t want to sell the house,” she said.
“I don’t see why I should be penalised in my old age for having been prudent enough to buy a nice house many years ago. If my husband had a body to be spinning it would be spinning in its grave.”
Mr Sunak must ditch this inequitable and ill-conceived policy.
Pensions tax relief
Among other proposals rumoured to be under consideration for next month’s Budget was an assault on higher earners’ pension perks.
Currently, everyone receives an effective top-up to their pension savings from the Government. It is paid at each taxpayer’s marginal rate, so the top-up is more valuable for higher earners.
Abolishing tax relief for this group would mean anyone who earns more than £50,000 would lose tax benefits worth 20pc or 25pc of contributions.
Mr Javid was rumoured to be considering a move to a flat rate of relief. Scrapping this idea, described as “half-baked” by experts, would be a good first step for Mr Sunak if he wants to win over the party’s core voters.
One higher earner, Jonathon Webb, 56, from Leatherhead in Surrey, said his ability to plan for retirement would be “blighted” by the removal of higher-rate tax relief.
Mr Webb, who works in financial services, said: “It’s certainly not something I would have expected from a Conservative government and it doesn’t bode well for the future if this is still in their plan.”
David Gibb, a financial planner at Quilter, the wealth manager, said he would also lose out under the policy and described it as “counterintuitive”.
But Mr Javid’s exit does not guarantee that the prospect of a tax raid will follow him out of the door. The Government has the advantages of an outright majority and almost its entire term in front of it; the latter could encourage it to act sooner rather than later if it does opt for reform to pensions tax relief.
This newspaper urges Mr Sunak to resist the temptation and continue to allow savers to prepare for old age.
With his “favourite minister” now installed as Chancellor, Mr Johnson will have more influence over the Treasury and may be able to push through his previous ambition to raise the higher-rate income tax threshold from £50,000 to £80,000.
This would be popular and would remove around two-and-a-half million people from the higher-rate tax band.
The Government should also fulfil its pledge to raise the National Insurance threshold in line with the current £12,500 personal allowance – an £11bn gift to taxpayers that would result in almost two-and-a-half million workers no longer having to pay contributions.
Smaller increases to the threshold already announced will leave all workers more than £100 better off in 2020-21.
Landlords and stamp duty
Buy-to-let landlords have seen their finances repeatedly squeezed by Tory policies in recent years as the party has tried to rebalance the housing market in favour of first-time buyers.
The gradual removal of tax relief on mortgage interest means that from April landlords will be able to claim only 20pc of interest payments as a business expense. In some cases they face an effective tax rate of more than 100pc.
Nigel Spalding, who owns 60 properties in Rotherhithe, south London, said he paid an effective tax rate of 85pc on his income for the 2018-19 tax year. He said he expected this to rise to 155pc by the 2020-21 tax year, when the tax reliefs are fully withdrawn. Before the tax changes, he said he typically paid a rate of about 25pc.
“It has been very complicated to understand what this means in practice,” he said. “And I am a chartered accountant by trade.”
Mr Spalding, 55, could transfer his properties to a company, which would once again allow him to offset all his mortgage costs against tax. However, this would incur a hefty capital gains tax bill as they have been owned for decades. He also expressed fear that property companies would be the next victims of a Tory tax attack.
The 3 percentage point stamp duty surcharge on additional properties has further discouraged landlords. The duty is often blamed for slowing the property market for all buyers.
In his previous role as chief secretary to the Treasury, Mr Sunak applied a further surcharge for purchases made by non-residents. This could be increased now he has the keys to No 11.
Instead we urge him to replace the present complex and perverse mess with simpler and fairer policies for the taxation of investment property.
The social care crisis is causing elderly people to lose their savings and in some cases their homes to pay for lengthy stays in care homes. Mr Johnson has yet to lay out his plans.
Baroness Altmann, a former pensions minister, said answers were needed urgently. She said the Chancellor could help by providing tax incentives to encourage people to save for later-life care. A “care Isa”, for example, could allow people to save tax-free and if unused could be passed on free from inheritance tax.
Baroness Altmann added: “There is no incentive to make provision for social care. If you are approaching your 80s and haven’t yet needed social care the rational thing to do is spend all your money.”
The Chancellor should radically simplify IHT, Britain’s most hated levy.
Receipts from the 40pc tax are higher than ever at £5.4bn and are expected to rise to almost £7bn by 2023. Steadily rising property prices have pushed middle-class families into paying a tax supposedly the preserve of society’s wealthiest.
George Osborne promised as chancellor to free Middle England from this burden, often viewed as a tax on income and savings already taxed, by raising the “nil-rate band” to £1m. Instead he introduced a complicated “family home allowance” that increased the threshold for many but further convoluted the system.
His successor, Philip Hammond, commissioned a review from the Office of Tax Simplification into how to make the system easier to understand. It criticised the family home allowance and made a raft of recommendations, but none has been adopted.
Last month a cross-party group of MPs called for the IHT rate to be cut to just 10pc and for all but the most vital reliefs – for spouses and charities – to be abolished.
Mr Sunak should at least raise the main threshold and scrap the complex family home allowance.
Mr Javid had promised a review of an impending tax crackdown on freelancers known as IR35, alongside a range of other reforms. Mr Sunak should carry this through but should also delay the policy’s implementation, due in April, until its true impact can be assessed.
Freelancers claim that IR35, which aims to crack down on those who pretend to be self-employed in order to pay less tax, will cost legitimate workers thousands of pounds in lost income. They will effectively be taxed as employees without receiving benefits such as holiday and sick pay.
This week a group of industry leaders wrote to Mr Javid to call for a 12-month delay.