Think tank calls for Lifetime Isa and Help to Buy Isa to be scrapped

The Resolution Foundation, a respected think tank, has labelled the Lifetime Isa and Help to Buy Isa expensive wealth subsidies.

The government could save itself £7 billion a year by scrapping a handful of wealth taxes and subsidies, research from leading think tank the Resolution Foundation has found.

As part of a wide-ranging report, the think tank took aim at pensions and Isas, describing the latter as an “active subsidy for those already lucky enough to have wealth”. In particular, it added that two of the newest Isas launched over the past couple of years, the Lifetime Isa and Help to Buy Isa, should both be scrapped.

Together the two Isas, which are primarily aimed at millennials as a means to help them get a foot on the property ladder or to save towards retirement, is projected to cost the government around £1 billion a year by 2022-23.

In the case of the Lifetime Isa, take-up since launch in April 2017 has been largely underwhelming, with only a dozen or so providers offering the Isa in either cash or stocks and shares form. Moreover, some critics have slammed the Isa as simply offering high-earners another tax break, a view the Resolution Foundation agrees with. 

The Help to Buy Isa, on the other hand, was launched earlier, in December 2015, and will stop being available to new investors in December this year. It is designed specifically for first-time buyers looking to build up a deposit for a house, but via a cash Isa rather than a stocks and shares Isa

The Resolution Foundation labelled both the Lifetime Isa and Help to Buy Isa “expensive wealth subsidies”.

It adds: “A government serious about saving money to address the welfare state challenges of the coming decades in a fair way would certainly look at the Lifetime Isa and Help to Buy Isa.

These allow young people with the means (including some Resolution Foundation staff) to get up to £1,000 of cash from the government each year, through a kind of reverse means-testing – the support only goes to those lucky enough to already have quite a bit to save.

“While the objectives of elements of these schemes (such as encouraging youth home ownership) can be desirable, the reality of their operation is absurdly generous and mistargeted. They should be scrapped.”

Elsewhere, the think tank once again urged the government to tackle the thorny issue of pension tax relief. It has previously called for a “flatter system” that would help solve wealth inequality, arguing for pension tax relief to be set at 18% for basic-rate taxpayers and 28% for higher-rate payers, as is the case for capital gains. 

In this report, though, it argues that there should be a clampdown on the tax-free lump sum, arguing that it should be capped at £40,000. It points out that the current ability to take more than £250,000 tax free (before hitting the Lifetime Allowance) is worth up to £119,000 to an additional rate taxpayer, £105,000 to a higher rate payer, £53,000 to a basic rate payer. But for lower income pensioners who earn less than the personal allowance it is worth nothing.

It adds: “That’s very generous, very regressive, and a strange incentive not to stagger your retirement income. Capping the tax-free lump sum at £40,000 would raise £2 billion a year, while leaving three-quarters of future pensioners unaffected.”

In addition, the think tank calls for council tax and inheritance tax both to be reformed, while also urging the government to limit entrepreneurs’ relief.

- Editor's Comment: Why the Lifetime Isa won't be missed 


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