Inheritance tax should be a levy on the most wealthy estates, not on ordinary home owners

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The way in which inherited assets are currently taxed needs to be reformed, and urgently. From being a levy on the very wealthiest, inheritance tax was paid last year on more than 34,000 estates - almost double the number five years before. This is an extraordinary increase: here we have a tax that now stretches much further down the wealth scale than was envisaged, without ever having been subject to reconsideration by Parliament. It has suited the Government to raise the threshold for liability, when it has done, only in line with with overall inflation, not in line with house-price inflation, which has been of a quite different order.

The way in which inherited assets are currently taxed needs to be reformed, and urgently. From being a levy on the very wealthiest, inheritance tax was paid last year on more than 34,000 estates - almost double the number five years before. This is an extraordinary increase: here we have a tax that now stretches much further down the wealth scale than was envisaged, without ever having been subject to reconsideration by Parliament. It has suited the Government to raise the threshold for liability, when it has done, only in line with with overall inflation, not in line with house-price inflation, which has been of a quite different order.

While the explanation for the present state of affairs may not be hard to divine - house prices have soared across much of the country within less than a generation - a satisfactory solution will be much harder to find and is bound to be contentious. For if, as is likely, the Government wants to raise the same amount of money, or more, than at present, there will have to be losers as well as winners. And the big question then is who the chief losers should be.

The report published today by the centre-left Institute for Public Policy Research (IPPR) is a welcome opening salvo in what should become a wide-ranging debate. In view of the IPPR's known closeness to the Government, however, some are already seeing its recommendations as a precursor of government plans. We hope that this is not so, because the solution it offers manages to be both mean to a very large number of home owners and insufficiently radical as well.

The IPPR advocates what it calls a "more progressive" inheritance tax. It would leave the £263,000 threshold in place, but replace the flat 40 per cent tax on the excess with three graded bands of 22 per cent, 40 per cent and 50 per cent. With the 50 per cent rate applying only to estates valued at more than £763,000, it reckons that only 13 per cent would be liable to tax at the highest rate, leaving the rest either unaffected or taxed more lightly. It claims that an extra £150m or so a year would be raised, that could be spent on increasing contributions to the proposed Child Trust Fund.

This is all in accord with the IPPR's wider agenda, which - it says - is to counter the "worrying" rise in inequality in Britain over the past 10 years, a rise that has only accelerated since Tony Blair became Prime Minister. The motive is admirable. We doubt, however, whether these recommendations will come anywhere near producing the desired result.

The majority of those caught by the tax at present are ordinary house-holders who are suddenly discovering that the equity they have in their home exposes them - or rather their heirs - to a swingeing rate of tax that they have not had the opportunity to plan for. Many are genuinely shocked to learn, first, that houses they bought many years ago are now worth so much more and, second, that their heirs will be liable for what they always regarded as a rich person's tax.

But a rich person's tax is precisely what the inheritance tax was intended to be, and what it should become again. Rather than leave the existing liability threshold in place, as the IPPR proposes, with a lower, 22 per cent, band for estates up to £288,000, the threshold should be drastically raised to lift the vast majority of home-owners out of liability altogether. As any aspiring first-time buyer in London and the South-east well knows, even £300,000 will hardly buy a family house; the same is true in many other parts of the country where house prices are high.

Nor, at the very top of the scale, will a new higher rate of tax necessarily produce as much new revenue as the IPPR expects. The seriously rich have always been able to arrange their affairs in such a way as to minimise their tax liability. Rather, it will penalise those further down. Outright abolition of the tax for the majority, coupled with closer scrutiny of avoidance schemes and loopholes, might, in the end, have a greater effect.

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