Inheritance tax cut ‘complicates tax system’, IFS warns

13 Apr 15

Plans set out by David Cameron to cut inheritance tax on family homes will further complicate the tax system without any strong economic argument for the change, the Institute for Fiscal Studies has said.

Examining the policy to allow parents pass on homes worth up to £1m tax-free, IFS director Paul Johnson and deputy director Carl Emmerson said IHT, which is currently charged at 40% above an allowance of £325,000 transferred to children, was not paid by over 90% of estates.

Under the Conservative plan, a new £175,000 per person transferable IHT allowance for main residences would be introduced when they are passed to children or grandchildren. For many couples, this will give a total allowance of £1m, when added to each person’s initial £325,000 allowance, which is also transferrable between a couple. The allowance will be tapered away from those leaving more than £2m, with those leaving more than £2.35m not expected to benefit from the new allowance.

The IFS analysis highlighted the Conservative estimate that the policy would amount to a tax cut of about £1bn. With around 50,000 estates forecast to pay the tax over the next few years this gives an average gain per IHT paying estate of around £20,000.

Since the children of those with very large estates are disproportionately towards the top of the income distribution, the gains from this cut will also go disproportionately to those towards the more well-off, they highlighted.

The think-tank also stated that a Treasury document, leaked to The Guardian last month, had estimated that, based on Budget 2014 forecasts, the policy would reduce the proportion of estates liable for IHT from 8% in 2015/16 to just over 6% by the end of the parliament. This is anticipated to rise to just over 10% under current policy.

However, the document concluded ‘there are not strong economic arguments for introducing an inheritance tax exemption specifically related to main residences’.

Among the problems is that the policy will encourage investment in owner-occupied housing rather than other more productive investments and discourage downsizing late in life when that might otherwise be appropriate.

Setting out the policy yesterday, Cameron said the wish to pass something on to the next generation was the most basic, human instinct.

He had wanted to act for ‘a long, long time’ to cut inheritance tax, and the government had already acted to allow people to pass on both their ISA and their pension savings.

‘And I can tell you today that the next Conservative government would go much further. We will take the family home out of inheritance tax.

‘That home that you have worked and saved for belongs to you and your family. You should be able to pass it onto your children… the tax man will not get his hands on it.’

Cameron said inheritance tax was never meant to be paid for people who had worked as teachers or nurses, or had run small businesses.

‘It was never meant for people in modest homes, on middle incomes. But that’s who has been sucked into paying this tax.

‘Look at the level that inheritance tax is currently set at: £325,000 per individual. Do you know how many homes in our country fall above that amount? Almost a quarter of them. I wouldn’t describe a quarter of the people in our country as super rich.’

Responding to the policy, Labour’s shadow chief secretary to the Treasury Chris Leslie said the Conservatives had promised to cut inheritance tax before the last election, which they had not done.

‘At a time when our NHS is in crisis and most working people are paying more under the Tories, it cannot be a priority to spend £1bn on a policy which the Treasury says would not apply to 90% of estates,’ he added.

‘Labour has made a different, fairer choice. We will go further on restricting pension tax relief for the very highest earners in order to cut tuition fees and increase grants for the next generation.’

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