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Cameron's plan to cut inheritance tax would create social care black hole

The Tories have previously pledged to fund social care reform by freezing the inheritance tax threshold.

Tories' previous pledge contradicted.
David Cameron during his visit to the headquarters of ventilation manufacturer, Vent-Axia on January 23, 2014 in Crawley. Photograph: Getty Images.

George Osborne's 2007 pledge to raise the inheritance tax threshold to £1m, which spooked Gordon Brown into calling off an early election, is still remembered as a political masterstroke. But the combination of the crash and the coalition means that the Tories haven't even come close to delivering it. In the 2012 Autumn Statement, Osborne announced that the inheritance tax threshold, frozen since 2009 at £325,000 (£650,000 for couples), would rise by just 1 per cent in 2015-16 to £329,000. More recently, he revealed that to help meet the £1bn a year cost of the coalition's social care plan, the threshold will be frozen at £329,000 until at least 2019. Many more "ordinary people", to use Osborne's 2007 words, will be hit by inheritance tax (although, in reality, only around 6 per cent of estates are affected). Were the threshold to rise in line with inflation, it would stand at £420,000 in 2019.

It is notable, then, that when asked about this subject at a pensioners' event today (hosted by Saga magazine), David Cameron suggested that the Tories would promise relief in their manifesto. He said:

We put in our manifesto that we wanted to take it to £1m but we did not win an outright majority [and] the pledge did not make it into the Coalition Agreement.

Would I like to go further in future? Yes I would. I believe in people being able to pass things down through the generations and onto our children, it builds a stronger society.

Inheritance Tax should only really be paid by the rich, it shouldn't be paid by those people who have worked hard and saved and brought a family house.

The ambition is still there, I would like to go further. It's something we'll have to address in our election manifesto.

It is unclear whether this amounts to a commitment to repeat the pledge of a £1m threshold, but Cameron's words suggest that he is planning a significant increase in the starting level.  What he may or may not be aware of is that this would leave a black-hole in his social care funding plan, meaning tax rises or cuts elsewhere. In the age of austerity, there are no cost-free pledges.

Incidentally, it's worth noting that Osborne, according to Janan Ganesh's recent biography, was secretely glad when the Lib Dems gave him political cover to abandon the pledge as it had come to reinforce the Tories' reputation as "the party of the rich".

Cameron also used today's event to give the clearest signal yet that the Tories will again pledge to protect universal pensioner benefits in their manifesto. He said: "We will set our policy for the next parliament at the next election. I don't want to prejudge that. But the only thing I would say is that people think you save lots of money by not giving these benefits to upper-rate, top-rate taxpayers. You save a tiny amount of money and you always introduce another complexity into the system. We made our promises for this parliament, we kept our promises, I'm proud of that."

It is rather disingenuous of Cameron to protest that means-testing the benefits would raise little money when one could say the same of measures such as the benefit cap (which is forecast to raise £110m) and the bedroom tax (£490m - and both, as analysts have warned, may end up costing more than they save by increasing homelessness and other problems). But the view among the Tories is that, having lost many pensioner voters to UKIP since 2010 (some of whom have been clawed back by Osborne's Budget), they can't afford to hand Nigel Farage another attack line.