Underlying all Liberal Democrat tax policy is a strong framework of principles to which all Liberal Democrat tax policies will conform. These are outline below:
Under this Labour Government millions of people on low incomes are forced to pay hundreds of pounds in income tax every year, keeping pensioners on the bread line and meaning that for many people in low paid jobs, work simply doesn't pay. Even a person working full time earning the minimum wage sees nearly £1000 taken from them in income tax. The Liberal Democrats want to radically rebalance the tax system by cutting taxes for people on low and middle incomes, which we will pay for by cutting reliefs, closing tax loopholes that benefit the wealthiest and a 1% levy on properties over £2m.
We propose to raise the threshold at which people start paying income tax from current levels to £10,000, cutting the average working age person's income tax bill by £700 and cutting pensioner's income tax bills by £100. These plans will mean that almost 4 million people on low incomes will no longer have to pay any income tax at all. All figures are rounded to the nearest £100m; these figures will be subject to change following the 2009 PBR and the 2010 Budget
• Details of tax changes:
Increasing the personal allowance to £10,000 per person: The personal allowance for people under 65 is currently £6,475. It is £9,490 for people between 65 and 74 and £9,640 for people aged 75+. Raising all personal allowances to £10,000 in 2010-11 will cost £16.54bn and amount to a £700 income tax cut for the average person. It would mean that almost 4 million people would no longer have to pay income tax.
• Closing tax loopholes and cutting reliefs that benefit the wealthiest:
Restriction of tax relief on pension contributions to the basic rate: Those on high incomes benefit disproportionately from pensions tax relief because they pay a higher marginal tax rate than people on lower incomes. For example in 2008-09 1.5% of people saving for a pension earned over £150,000, yet they received a quarter of all pensions tax relief on their contributions. We propose to restrict the income tax relief on contributions made by all individuals to the basic rate of 20%.
Capital gains tax [CGT] - alignment of rates to income tax rates: CGT rates are significantly lower than income tax rates which gives people particularly the wealthiest an incentive to present their income as capital so that they can pay a lower rate of taxation. We propose to tax capital as income in order to remove this anomaly. This is a return to CGT system created by Nigel Lawson during the Thatcher Government.
Capital gains tax - reduction of annual exemption to £2,000: Under current rules, the first £10,100 of capital gains made by an individual are exempt from CGT. The purpose of this exemption was to prevent small capital gains falling into the tax system. However as the exemption is so large it has become a significant part of tax planning. We propose to keep a small annual exemption of £2,000 that will prevent the smallest transactions from being liable for CGT, but which will catch many more transactions made by wealthy individuals that would otherwise not be caught. It is important to remember that under Liberal Democrat plans those on very low incomes who make capital gains will still not have to pay tax due to our proposed £10,000 personal allowance.
A 1% 'mansion tax' for properties over £2m to tackle council tax anomaly: Our progressive property levy would only affect properties worth more than £2m. Current council tax bands mean a property worth £750k is taxed the same as one worth £10m. We propose to tackle this distortion. The levy would be taxed at a rate of 1% on the value of a property over £2m. This means a home worth home worth £2.1m would pay 1% x (£2.1m-£2m) = £1000 per annum. A home worth £5m would pay 1% x (£5m - £2m) = £30,000 per annum. Based on land registry data this levy would affect between 70,000 and 80,000 (around 1 in 400 properties) of the most valuable residential properties in the UK and raise around £1.7bn.
• Green taxation:
Replacing Air Passenger Duty with a per plane tax: Air Passenger Duty (APD) is charged on passengers flying from a United Kingdom airport. By replacing the APD with an 'Aviation Duty' which would be levied on planes as opposed to passengers we would provide an incentive for airlines to fill seats and to discourage them from running empty flights as well as ensuring that cargo flights are brought within the scope of the duty since they currently are not covered by the existing regulations.
Introduction of a levy on domestic flights: This levy is aimed to discourage travellers from choosing air travel over land travel for routes in which the latter is readily available. In order to ensure that travel from the extremes of the country are not unfairly penalised by geographical distance the domestic duty would only apply to flights to and from destinations for which rail travel could not be provided in less than 6 hours.
• Anti avoidance measures:
Avoidance measures - Income tax, CGT, NICs: We will combat National Insurance Contribution [NIC] leakage by changing the taxation of benefits in kind. Currently the amount of NICs payable on benefits in kind such as private health insurance is lower than if a person was paid the same amount in cash. Removing this anomaly will lead to a fairer basis of pay as well as preventing tax leakage. In addition to this we will also focus greater levels of HRMC staff time to cracking down on income tax evasion. This additional staff time will come from the lower number of people being administered in the income tax system under Lib Dem proposals.
Avoidance measures - Corporation tax: We will introduce a new general anti-avoidance provision for corporation tax. The purpose of this provision will be to stop companies structuring their business in a particular way when their main objective is to reduce their corporation tax bill. A common argument against such a proposal is that the cost for HMRC to administer such a provision would be extremely high and that HMRC are inadequately resourced for the service. In order to address this, we propose that companies requiring clearance and certainty over the tax treatment of a transaction will pay for the services of a specialist HMRC team at commercial rates (similar to professional services e.g. lawyers and accountants); this will be a revolutionary change to the HMRC services, drawing it closer to commercial practices.
Avoidance measures - Stamp duty: Stamp Duty Land Tax (SDLT) can currently be avoided, if a company or an individual sets up an offshore business structure so that the property does not appear to be sold by a UK taxable person. In addition Stamp Duty can be reduced from the standard rate to just 0.5% if the property is held by a UK company and the company is sold. To stop this we would bring forward legislation which looks through any structured transaction so that where there is any beneficial UK ownership, the property would fall liable to SDLT and the duty cannot be avoided.