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?

Yes

* 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

No

* 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

News
Actor Burt Reynolds last year
peopleBurt Reynolds, once among the most bankable actors in Hollywood, is set to auction his memorabilia
News
Gordon and Tana Ramsay arrive at the High Court, London
newsTV chef gives evidence against his father-in-law in court case
News
people

Watch the spoof Thanksgiving segment filmed for Live!
News
The data shows that the number of “unlawfully” large infant classes has doubled in the last 12 months alone
i100Mike Stuchbery, a teacher in Great Yarmouth, said he received abuse
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
The starship in Star Wars: The Force Awakens
filmsThe first glimpse of JJ Abrams' new film has been released online
Arts and Entertainment
The cover of The Guest Cat – expect to see it everywhere
books
News
i100 Charity collates series of videos that show acts of kindness to animals
Arts and Entertainment
One of the installations in the Reiner Ruthenbeck exhibition at the Serpentine Gallery
artCritics defend Reiner Ruthenbeck's 'Overturned Furniture'
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Austen Lloyd: Company Secretary

    Excellent Package: Austen Lloyd: EAST ANGLIA - SENIOR SOLICITOR LEVEL ROLE** -...

    Citifocus Ltd: German Speaking Client Specialist

    £Attractive Package: Citifocus Ltd: Prestigious asset management house seeks a...

    Citifocus Ltd: Performance & Risk Oversight

    £Negotiable: Citifocus Ltd: This is a varied role focusing on the firm's mutua...

    h2 Recruit Ltd: Sales Director - SaaS (SME/Channel) - £140,000 OTE

    £90000 - £140000 per annum + benefits: h2 Recruit Ltd: Are you a high achievin...

    Day In a Page

    Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

    Christmas Appeal

    Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
    Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

    Is it always right to try to prolong life?

    Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

    What does it take for women to get to the top?

    Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
    Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

    Knitting pretty: British Christmas Jumpers

    Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
    French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

    French chefs campaign against bullying

    A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
    Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

    Just what you need on a New Year hangover...

    Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
    Cuba set to stage its first US musical in 50 years

    Cuba to stage first US musical in 50 years

    Claire Allfree finds out if the new production of Rent will hit the right note in Havana
    Christmas 2014: 10 best educational toys

    Learn and play: 10 best educational toys

    Of course you want them to have fun, but even better if they can learn at the same time
    Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

    Paul Scholes column

    I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
    Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

    Lewis Moody: Lancaster has made all the right calls – now England must deliver

    So what must the red-rose do differently? They have to take the points on offer 
    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

    It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
    Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

    Sol Campbell cries foul at Labour's mansion tax

    The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
    Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

    Sarkozy returns

    The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
    Is the criticism of Ed Miliband a coded form of anti-Semitism?

    Is the criticism of Miliband anti-Semitic?

    Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
    Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

    Ouija boards are the must-have festive gift

    Simon Usborne explores the appeal - and mysteries - of a century-old parlour game