The Big Question: How did inheritance tax become such a contentious political issue?
Why are we talking about it now?
The Shadow Chancellor, George Osborne, wants to raise the threshold for inheritance tax to £1 million, effectively abolishing it. The house price boom, especially in the south, has pushed more middle-class households into paying a tax that was once assumed to be for plutocrats. Given that the family home is the main asset of most people, it is, effectively, a property tax.
Such levies have never been popular, the most notorious being the poll tax or community charge, which helped end Mrs Thatcher's time as prime minister. With an imminent general election being widely speculated, Mr Osborne is no doubt hoping that his idea will attract voters in marginal constituencies, with an eye on their inheritance.
How much is inheritance tax?
Part of an estate over a threshold of £300,000 is taxed at 40 per cent; thus a £400,000 estate would be liable for £40,000. Spouses and civil partners are exempt.
What's wrong with inheritance tax?
It is now targeting people it was never meant to hit, though that can be a London-centric view. House prices have risen so rapidly in the capital that the average home passed the threshold last year, with the rest of the south-east not far behind.
However, UK average house prices are still some way off, though the gap has narrowed markedly. In 1997 the threshold was set at about twice average house prices; now it is about 50 per cent higher. Increases in the thresholds and a cooling property market should stop many more estates falling into eligibility in the near term.
Its enemies regard inheritance tax as a "tax on death" and a disincentive to work hard, save and pass wealth on to future generations. Attempted avoidance can lead to family arguments about money, which aren't much fun.
What's right with inheritance tax?
It's redistributive. Like all such measures it tends to reduce the advantages the well-heeled already enjoy and promotes a more meritocratic society, with inherited wealth a less powerful factor in dictating life chances. Crucially as well, all previous capital gains on the family home are exempt from tax (unlike any other investment).
The Government's view is that "inheritance tax is a fair and necessary means of raising revenue for public services, and is paid by only six per cent of all estates. No previous administration has ever linked tax thresholds – including inheritance tax thresholds – to price movements of any particular asset, such as housing, and this Government is no different."
The Chancellor announced in the Budget that the zero-rate threshold would increase again, and will continue to increase until April 2010 – when the threshold will reach £350,000 – ensuring that 94 per cent of estates continue to pay no inheritance tax. Anyone who wants to abolish inheritance tax needs to explain exactly how they plan to fund the £3.6bn cost – the equivalent to more than 1p on income tax; or 18p on petrol duty; and almost double what we are spending this year on counter-terrorism and security.
Who pays it?
About 38,000 people, against say 27,000 in 2002, but much lower than the 61,000 who were caught in 1976, when Denis Healey was Chancellor in the last Labour government and had promised "howls of anguish" from the rich.
Is it worth it?
Yes and no. It is growing at quite a clip; about £4 billion projected this year, up from £3.3 billion in 2005 and £2.3 billion in 2002. Mr Osborne's proposal would knock around £3.1 billion off that, leaving £800 million. However all these figures this must be set in the context of a total tax take of £453 billion.
Death and taxes; whose idea was it to put them together?
Pitt the Younger was the Tory prime minister when "legacy, succession and estate duty" came in as long ago as 1796. The scope of estate duty was gradually extended in the 19th century. However, unless the assets were valued at £1,500 or more (perhaps £500,000 in today's terms), the taxes were often not collected. Legislation in 1853, 1894 and 1909 (the so-called "people's budget" of David Lloyd George) further reformed the system, in the latter case to help pay for dreadnoughts and the newly introduced old age pension.
After the Second World War punitive death duties led, among other things, to the demolition of many stately homes. Capital Transfer Tax was introduced in 1975 to curtail people gifting assets to others while still alive to avoid tax.
Can I dodge inheritance tax?
Not easily. This Government has been vigilant in closing loopholes, even going to the unusual length of retrospective legislation to shut down one popular wheeze, that of placing the family home in a trust. Various levies on trusts, imputed tax liabilities on homes given away but still occupied and "pre-owned assets" rules closed off most escape routes. One tax efficient possibility would be to raise a mortgage on the home, and give away the money, with the debt forming a charge on the estate on death. But this would mean servicing the cost of a mortgage.
Alternatively a couple could split the value of the home (technically severing a joint tenancy and becoming "tenants in common") so that when one of them dies that part of the house, usually below the threshold, is left to the children. However the offspring could force the surviving parent to sell their home. Interfamily agreements can help, but if they are strong enough to protect mum or dad they'd probably fall foul of the tax rules.
Andrew Tailby-Faulkes, tax partner at Ernst and Young, advises many clients "don't bother" when it comes to protecting the family home from tax. Probably the only reliable way of not paying it is to use an offshore trust, thought this is reserved for non domiciles – ironically the people Mr Osborne is targeting with a £25,000 levy in order to pay for his inheritance tax changes.
Any other ideas?
If you are feeling philanthropic, you can leave your property, tax free, to a UK charity, a museum, university, the National Trust and, if you're feeling especially magnanimous, UK political parties. Giving away money, shares, art, stamp collections, gold coins or other goodies is usually easier because you can do it incrementally; you can simply gift these up to £3,000 a year and they won't count towards your estate for tax purposes.
Is inheritance tax unpopular?
Yes. In 2004, 69 per cent of respondents in a MORI poll agreed that it was "unfair" to tax property after death, with 41 per cent thinking it ought to start at a much higher level, and about two thirds favouring banding rather than the relatively blunt instrument of a flat rate of 40 per cent.
So should we ditch inheritance tax?
* It is not just taxing the super rich, but now affects middle-class families as well as those inheriting large estates
* In some areas of the country, the threshold is actually below the average house price and the gap is closing everywhere
* More than two-thirds of the population see it as an unfair tax, while 40 per cent think the threshold is too low
* There should be a tax on income that has not been earned, but only received because of the family one is born into
* It should continue in a more flexible form, such as banding used for council tax and income tax
* Abolishing it would cost the Treasury £3.6bn, which equates to more than an extra 1p on income tax
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
How couples can protect their financial interests when cohabiting
Authorities failing in hunt for 'most wanted' tax dodgers who owe HMRC £844m
Child Maintenance Service to replace Child Support Agency - but is it better?
A student's guide to financial survival: You don't have to drown in debt at university
Bargain Hunter: Kit yourself out in sports gear - at a healthy discount of up to 75%
- 1 Paul Scholes: Manchester City were so good against Liverpool I felt like turning the television off
- 2 Notting Hill Carnival: Woman shares selfie after being ‘punched in face for telling man to stop groping her’
- 3 Pamela Anderson rejects ice bucket challenge because of ALS experiments on animals: 'Mice had holes drilled into their skulls'
- 4 Homer Simpson takes the ALS ice bucket challenge because of course he does
- 5 Hello Kitty is not a cat after all
Exclusive: We share blame for creating 'jihad generation', says Muslim strategist
Robin Williams Emmys tribute led by Billy Crystal criticised for including 'racist' joke about Muslim woman
The Rotherham child abuse scandal is a tale of apologists, misogyny and double standards
Scottish independence TV debate: Pumped-up Alex Salmond bounces back in bruising second round against Alistair Darling
Do you realise just how foolish the UK looks?
Ukip Douglas Carswell defection: Tory MP jumps ship to join Nigel Farage
- < Previous
- Next >
iJobs Money & Business
Highly Competitive Salary: Austen Lloyd: CITY - An excellent new instruction w...
£500 per day: Harrington Starr: SQL Server Developer SQL, PHP, C#, Real Time,...
£600 per day: Harrington Starr: C#.NET Developer C#, Win Forms, WPF, WCF, MVVM...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony