LITRG response to a proposal to impose a new income tax charge
Response to the Capital Taxes Policy Group, Inland Revenue
We (the Low Incomes Tax Reform Group) are responding to your consultation on Pre-Owned Assets published on 11 December 2003. As you will be aware, we only consider issues that may affect individuals on low incomes and for the purpose of this response we have focused our attention just upon the constituency of older people on low incomes.
Before moving on to specific comments, we have to express our disappointment that the Government are unable to think of a way of countering the avoidance of IHT, within the IHT regime.
The invention of a new income tax charge brings with it many disadvantages impacting on poorer people:
- more complex tax returns
- more record-keeping
- more literature to read and to understand uncertainty as to scope, so requiring existing non-taxpayers to have tax knowledge of it, to ensure they are outside its scope
We have been told a number of times by Revenue officials that we worry too much about people who are outside the tax net, because their incomes are too low and tax and contact with the Revenue, should not be an issue for them. But from our experience of running clinics to help such people over a number of years we have learnt that concerns as to whether they should be paying tax looms large in the minds of pensioners whose income may be perhaps only £5000 per year.
We are now to have a potential annual charge and it will be seen, in the press and elsewhere, as concerning money given away by parents or related to the main residence. This is likely to generate fear both amongst those who have given away things in the past and who were thinking of doing so in the future.
Undoubtedly significant extra Revenue resources will be required annually to reassure or explain to this population the implications of this legislation.
Causes for concern
The consultation document is light on detail and therefore its impact is difficult to assess, but the following seem to be correct:
- an evaluation of the scope of the charge requires knowledge of family transactions that may date back for the last three-quarters of the century
- detailed record keeping will be required for the future it will be intrusive in knowledge of normal family arrangements
It is conceivable that the provisions may create all sorts of unintended effects:
- people that have given away assets or cash to their children, perhaps many years ago, and now have fallen upon hard times, risk an income tax charge if helped in their final years by their children
- there are a multitude of arrangements surrounding the use of the family home in long term care scenarios and where family arrangements enable the aged relative to remain within the community; such arrangements could be made impractical by an income tax charge
- gifts over many years by, for example, grandparents to grandchildren might generate an income tax charge if related family members helped the grandparents in later life
These are some of the more straightforward circumstances, which we envisage would require detailed evaluation.
As we indicated previously, any perceived abuses of the IHT regime should preferably be managed within that tax structure.
If however it is decided to pursue this course then the de minimis limit must be similar in quantum to the nil rate band under IHT. If the limit were to be lower then all the bureaucracy, intrusion, arbitrary results and worry that we envisaged earlier will come to pass.
The basis of the de minimis limit must be clear to a typical pensioner. It should not be acomputational de minimis i.e. where you have to collect all the facts, do the sums and then see if the product is less than the set figure. All that would achieve is an increase in Revenue staff and fees paid to tax advisers.
Another area of dispute, which will emerge is the vexed question of valuation. Who will do the valuations? Are valuations necessary before seeing if a de minimis limit is exceeded? Will the Revenue provide a free valuation service for those on low incomes?
We would also wish to understand how this charge is to be treated for the purposes of pension credit, tax credits and welfare benefits, such as housing benefit or council tax benefit.
These proposals fill us with trepidation as to the potential impact on people with low incomes saving for their long term care obligations.
It may be that any detailed proposals will address our fears. We do not envy the draftsman who has to bring in simple proposals to achieve your avoidance intent, without bringing in hundreds of thousands of innocent bystanders.
John Andrews Chairman Low Incomes Tax Reform Group 16 February 2004
Contact Name: John Andrews (Tel: 0844 579 6700, Fax: 0844 579 6701)