1987 Finance Act

The 1987 Finance Act: A Landmark Shift in UK Taxation

The Finance Act of 1987, enacted in the United Kingdom, brought about significant changes to the country’s tax landscape. Introduced by Chancellor Nigel Lawson, it primarily focused on simplifying the tax system, encouraging enterprise, and reducing the overall tax burden. While some measures proved beneficial, others sparked debate and had lasting consequences on various sectors of the UK economy.

One of the most notable changes introduced by the Act was a further reduction in the basic rate of income tax, continuing a trend set in previous years. The aim was to incentivize work and investment by allowing individuals to retain a larger portion of their earnings. This was aligned with the broader economic policies of the Thatcher government, which emphasized supply-side economics and individual responsibility.

Beyond income tax, the 1987 Act also addressed capital gains tax (CGT). It introduced a new regime designed to align CGT rates with income tax rates. This aimed to simplify the system and remove distortions that might have encouraged individuals to structure transactions solely for tax purposes. While the move promoted neutrality, it also effectively increased the CGT rate for some individuals, particularly those with lower income tax liabilities.

The treatment of employee share schemes underwent significant revision. The Act introduced new rules to encourage employee ownership and participation in company success. Favorable tax treatment was extended to approved share option schemes, making it more attractive for companies to offer these benefits to their employees. This measure was intended to foster a greater sense of alignment between employees and shareholders, boosting productivity and company performance.

The Act also made adjustments to inheritance tax (IHT), formerly known as capital transfer tax. The threshold for IHT was increased, meaning that a larger proportion of estates became exempt from the tax. This change reduced the tax burden on families inheriting wealth and was welcomed by many. However, critics argued that it disproportionately benefited the wealthy and contributed to increasing inequality.

Furthermore, the 1987 Finance Act addressed specific issues within various industries. For example, it introduced changes to the taxation of North Sea oil profits, reflecting the fluctuations in oil prices and the need to ensure the continued viability of the sector. Similarly, measures were implemented to combat tax avoidance in certain areas, demonstrating the government’s commitment to maintaining a fair and efficient tax system.

In conclusion, the 1987 Finance Act was a complex piece of legislation with far-reaching implications. While it aimed to simplify the tax system, encourage enterprise, and reduce the tax burden, its impact was multifaceted and subject to varying interpretations. The Act’s legacy continues to be debated, as its provisions shaped the UK’s economic and social landscape for years to come. It serves as a reminder of the intricate relationship between taxation, economic policy, and societal well-being.