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
Scottish Power hit with sales ban by regulator
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
There are 'dark corners' of the investment and pensions industry, says Pension Minister
Midweek Money: The end (of the tax year) is nigh: act now
Bank-beating exchange rates on your international payments
- 1 What happens to your body when you give up sugar?
- 2 Have sex with your iPad thanks to the new sex toy no-one asked for
- 3 The 'sex selfie stick' lets you FaceTime the inside of a vagina
- 4 Why you're almost certainly more like your father than your mother
- 5 Westboro Baptist Church couldn't picket Leonard Nimoy's funeral because they didn't know where it was
Durham Free School: 'Creationism taught at' free school facing closure
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
End of the licence fee: BBC to back radical overhaul of how it is funded
Nigel Farage promises Ukip will not 'stigmatise' would-be migrants – and says he wants 'everyone to speak the same language'
Ex-head of MI6: 'We shouldn't kid ourselves that Russia is on a path to democracy'
Most people think legal tax avoidance is just as wrong as illegal tax evasion, poll suggests
iJobs Money & Business
£8 per hour: Recruitment Genius: This Pension Specialist was established early...
£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
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