If we build up wealth during our life, why should the state claim it when we die?

It should be a matter of principle that people be encouraged to build and pass on the fruits of a lifetime's achievement

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If the Institute for Public Policy Research is devoting its attention to inheritance tax, it must be clear that even some Blairites in the Labour Party recognise that something is seriously wrong with a taxation system which robs people of relatively modest means of the fruits of their families' lifetime labours. This tax has become, under Gordon Brown, one of the most pernicious of all time. In recent years, the threshold has begun to bite in ways which could surely never have been imagined when the system was first introduced.

If the Institute for Public Policy Research is devoting its attention to inheritance tax, it must be clear that even some Blairites in the Labour Party recognise that something is seriously wrong with a taxation system which robs people of relatively modest means of the fruits of their families' lifetime labours. This tax has become, under Gordon Brown, one of the most pernicious of all time. In recent years, the threshold has begun to bite in ways which could surely never have been imagined when the system was first introduced.

No taxation system provides, so acutely as this, the opportunity for a traditional old-fashioned debate between the two main parties on the pros and cons of wealth redistribution. So the IPPR is to be congratulated for at least putting the issue at the centre of the political debate. The tax, at present, bites suddenly and arbitrarily at the higher 40 per cent rate, with no intermediate rates, and no regard to individual circumstances, except the current threshold figure of £263,000. The IPPR suggestion is that this figure should be extended by £25,000 to a mere £288,000 before the 40 per cent rate begins to bite, but that a basic rate of 22 per cent should still be paid on this extra £25,000. When an estate is valued beyond £763,000 it is suggested that a 50 per cent rate should apply.

While any amelioration of the pain caused by the current blunt instrument is to be welcomed, the gain for inheritors of modest estates, however, is likely to be small. The correct response to this debate should surely be whether it is right for the state to have any claim on the lifetime wealth built up by people. Inheritance tax has become no more than an unfair revenue-raiser mostly on the backs of people of modest means who have simply put most of their lifetime savings into their property which happens to have risen in value solely because of the recent property boom.

Most people are unaware of the provisions of inheritance tax until they are faced with its consequences. It used to be the case that this tax only applied - and was designed only to apply - to the extremely wealthy. In straight terms, this tax now covers everything that is left to beneficiaries and includes all personal possessions. Not everyone appreciates that it includes jewellery, cash, land and cars - as well as the family home, unless it is all passed to a spouse.

But the most iniquitous aspect of inheritance tax is that, according to a report last year from the tax advisers' body, IFA Promotion, about £1.4bn excess inheritance tax is paid unnecessarily and could be avoided. Their 2003 report revealed that 270,000 estates applied for probate and, purely because of rising property prices, the Chancellor netted £2.4bn thanks to poor knowledge of the system. By contrast, the super rich are able to employ accountants and tax planners to avoid what the little people are unable to do. Meanwhile, however, stories abound that children or other heirs to more modest estates have found themselves having to pay the tax bills out of their own funds. Some were even forced to take out bridging loans to meet tax liabilities because they were in the process of disposing of assets.

Of course, if everybody knew at least seven years before their death, when they were going to die, the Chancellor would receive no benefit. Transfers of assets seven years prior to death attract no inheritance tax. The super rich with disposable assets, in addition to property, often take advantage of these provisions. But it seems grossly unfair that most people, whose sole asset is invariably their house, are not equipped to take advantage of such legitimate loopholes. The IPPR suggests that clobbering the really rich with a 50 per cent rate will ensure they will pay the lion's share of the inheritance tax burden. But recent experience suggests it is precisely this category that will be able to dispose, prior to death, of their non-property assets by creative tax planning through the creation of inheritance trusts.

The Tories recently dabbed their toes into this territory by addressing the problem while being coy about a possible solution. Oliver Letwin, the Shadow Chancellor, noted last week that the number of UK towns where average house prices exceed the inheritance tax threshold has "rocketed from one to 86 since Labour came to power". In 1997, just one town - Gerrards Cross in Buckinghamshire - had an average house price higher than the threshold. The inheritance tax threshold then stood at £210,000. Since then, the threshold has increased by 22 per cent while house prices have risen by an average of 130 per cent.

There is little doubt, as Mr Letwin has observed, that Labour have, by stealth, used inheritance tax to clobber the lower middle classes. But it was regrettable that Mr Letwin stopped short of proposing an alternative. If the Government had raised the threshold in line with house price inflation, the threshold would probably be £360,000. It was a shame that Mr Letwin did not add in this extra sentence, but perhaps the spur of the IPPR report will embolden him to make a further announcement before the election campaign. This is good, old-fashioned Tory territory crying out for boldness. The implications of his statement suggest that the Tories may eventually come forward with a promise to increase the threshold. But the really eye-catching alternative would be a commitment to abolish inheritance tax altogether.

Refusing to raise inheritance thresholds in line with property inflation has been the unspoken, but not the only, weapon of Labour stealth tax increases. Similar refusals to increase the starting rate of the 40 per cent income tax band are also ensuring more people on modest earnings are being sucked into the higher rate tax bands. These are also likely to be the very people who will be suffering the added burden likely to be the result of John Prescott's review of the council tax system. Although the recently published options have been put on ice until after the next general election, there seems little doubt that the very owners of properties likely to be caught by inheritance tax are also expecting to be clobbered by the additional council tax bandings. At the weekend, the junior Northern Ireland minister conceded that the council changes would be "significant", adding that "it is only fair that those who can afford to pay do pay a fairer share as soon as possible".

Of course, there are those who might argue that any inheritance is simply a windfall gain for those lucky enough to have parents who saved wisely during their lifetime. Typical Labour supporters of wealth distribution may still believe that the Chancellor, rather than the children, should be the principal beneficiary of any will. But if people wish to leave 40 per cent of their money or property to Mr Brown, before their relatives, there is nothing to stop them writing him into their wills. For Tories, however, it should be a matter of political principle that people should be encouraged to build up and pass on the fruits of their lifetime achievements to whomsoever they like - and if they wish to cut the Chancellor out of their wills, Tory policy should work towards this goal.

mrbrown@pimlico.freeserve.co.uk

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