Most family homes will be exempt from inheritance tax under a plan to be announced by George Osborne in his Budget next Wednesday.
The Chancellor will implement a flagship pledge in the Conservatives’ general election manifesto to ensure that people can hand down their assets to their children or grandchildren when they die.
At present, inheritance tax is charged at 40 per cent above a threshold of £325,000 for an individual and £650,000 for married couples and civil partners. Mr Osborne is expected to bring in a “family homes allowance” that would raise the threshold to £500,000 for an individual and £1m for couples. It would take effect in April 2017 at a cost of £1.05bn a year, to be funded by reducing tax relief on pensions for people with incomes over £150,000 a year.
Mr Osborne, the then shadow chancellor, first promised to raise the inheritance tax threshold to £1m in 2007, a popular pledge which deterred the new Prime Minister Gordon Brown from calling a snap general election that Labour might have won. Mr Osborne believes he has a mandate for the shake-up after it was included in the Tory manifesto at the last two elections.
During the Coalition Government, the proposal was blocked by the Liberal Democrats who, like Labour, argued that it would help a small number of rich families.
What does five more years of the Tories mean for Britain?
What does five more years of the Tories mean for Britain?
1/8 Welfare payments will be slashed
One of the most controversial parts of the Conservative manifesto was to cut benefits for the working age poor by £12 bn over the next three years. But during the campaign they only said where £2 bn of these savings would come from. That leaves £10 bn still to find. Some experts think the only way they can close that gap is by means testing child benefit – with millions of families losing out
2/8 There will be tax cuts for those in work and those who die
The Tories will increase the threshold at which the 40p rate of tax becomes payable to £50,000 by 2020. They haven’t said so but it is also likely that at some point in the next five years they will abolish that 45p rate of tax altogether for the highest earners. They also want to increase the effective inheritance tax threshold for married couples and civil partners to £1m
3/8 There will be an in/out EU referendum in 2017
The next two years are going to be dominated by the prospect of a referendum on Britain’s membership of the EU. First off David Cameron has the daunting task of negotiating a deal with other EU leaders an acceptable deal that he can sell to his party so he can go into the referendum campaigning for a ‘yes’ vote. This may be unachievable and it is possible that the Tories may end up arguing to leave. Opinion polls show Britain is divided on EU membership, one poll this year showed 51% said they would opt to leave compared to 49% who would vote to stay in
4/8 There will be more privatisation of the NHS
Having won the election the Tories now have a mandate to go further and faster reforming the NHS. In order to make cost savings there is likely to be greater private involvement in running services, while some smaller hospitals may lose services they currently provide like A&E and maternity units
5/8 There will be many more free schools – and traditional state schools will become a thing of the past
The Tories plans to create 500 new free schools and make 3,000 state schools become academies. They will also carry on reforming the Department of Education and remove more powers from local authorities over how schools are run
6/8 On shore wind farms will be a thing of the past and fracking will be the future
Government spending on renewable energy is under real threat now the Lib Dems are no longer in power with the Tories. Subsidies are likely to be slashed for off-shore wind farm and other green energy supplies. Meanwhile there will be generous tax break for fracking as ministers try and incentivise the industry to drill for onshore oil and gas
7/8 There maybe more free childcare – but not necessarily
In the campaign the Tories pledged to double the amount of free early education for three- and four-year-olds from 15 hours a week to 30. The extra hours would only be offered to working families where parents are employed for at least eight hours a week. However they have not said where the money will come from to fund the pledge
8/8 Workers' rights could be reduced
The Tories want to slash business regulation, merge regulator and cut costs. The Lib Dems stopped them from reducing the employment rights of workers in power – but these are now under threat
However, Mr Osborne believes that many middle class families will benefit from his move because rising property prices have drawn many more of them into the inheritance tax net. Treasury figures show that the number of people paying it would rise from 35,000 to 64,000 by 2019-20 if the threshold remained unchanged. It has been frozen since 2009. The Office for Budget Responsibility said this year that unless the threshold was increased, house price growth could double the number of estates large enough to pay the tax to almost one in 10, pushing up the Treasury’s receipts by 70 per cent to £5.8bn over the next four years.
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The Chancellor is expected to announce measures to prevent the higher threshold becoming a disincentive to older people to downsize to a smaller property – for example, by moving to a retirement flat.
The reform will mean that 94 per cent of estates will not pay death duties. Under the Tories’ election plans, the “family home allowance” will be tapered away if people leave behind assets worth more than £2m. For every extra £1 above £2m, the allowance will be reduced by 50p, so it will be withdrawn entirely above £2.35m. Those leaving more than this amount will not benefit from the change.
The Institute for Fiscal Studies has said the measure would save estates a maximum of £140,000 and would “go disproportionately to those towards the top of the income distribution”. It quoted a leaked Treasury document as saying “there are not strong economic arguments for introducing an inheritance tax exemption specifically related to main residences”.
Inheritance Tax - key dates
1986: Inheritance tax replaces capital transfer tax at death
2007: George Osborne’s surprise pledge to raise the threshold from £300,000 to £1m heads off Prime Minister Gordon Brown’s plan to call autumn general election
2007: Labour Government accused of trying to steal Tory policy when threshold is made transferable between couples, in effect doubling it from £325,000 to £650,000 for them
2009: Threshold frozen at £325,000 for an individual and £650,000 for a couple
2010: Conservatives’ general election manifesto promises to bring in £1m threshold
2010: Osborne forced to abandon plan by Liberal Democrat Coalition partners
2015: Tory manifesto pledges £175,000 family homes allowance, to raise threshold to £500,000 for an individual and £1m for a coupleReuse content