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8 July 2015

Cutting inheritance tax will be good news for a privileged few, bad news for the rest

Cutting inheritance tax will mean happy days for the top 10 per cent, and nothing to everyone else.

By Tim Wigmore

The UK’s archaic taxation system taxes income too heavily but wealth too lightly. This acts as a roadblock to social mobility, which is the lowest in the western world.

And George Osborne is about to make it worse. When he unveils his Budget, the Chancellor will announce an increase in the individual inheritance tax threshold from £325,000 to £500,000, fully transferable between couples. No inheritance tax will be paid on a couple passing on a £1 million house to their children.

Only the wealthiest families will benefit. If the inheritance tax threshold were left untouched until 2018-19, it would only affect 10% of people. While cutting it does nothing for those in the bottom 90%, it amounts to a boon for those inheriting houses worth £1 million to £2.35 million (when the cut will be fully tapered off). Someone inheriting a £2 million home will benefit more than someone inheriting a £950,000 home. Exactly how this policy fits into the ‘One Nation’ playbook is not clear.

Osborne once recognised the great structural flaw in the UK’s taxation system. According to In It Together, Matthew d’Ancona’s study of the coalition, Osborne and Nick Clegg agreed a ‘grand bargain’ in 2012: reducing income tax to 40% and introducing a mansion tax in return. But David Cameron had other ideas. “Our donors will never put up with it,” the Prime Minister said before vetoing the idea.

Now taxation is becoming even more dependent on income rather than wealth. The inheritance tax cut will be paid for by reducing pension tax relief for those earning over £150,000; hardly a group many feel much sympathy for, but the upshot will be to prioritise those who inherit money over those who earn it.

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None of this is to say that inheritance tax is perfect. It is “a somewhat half-hearted tax, with many loopholes and opportunities for avoidance through careful organization of affairs,” as the IFS-led Mirrlees Review into inheritance tax noted in 2011. On the grounds of equality of opportunity, it advocated instead taxing individuals at progressive rates on the total amount of gifts and inheritances they received over their lifetime. Radical leftism this is not: Edward Heath’s Conservative government in 1972 proposed a similar policy.

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Robert Halfon, the Conservative Party’s vice-chair, wants to make the party logo a ladder to symbolise opportunity. Yet the cut to inheritance tax will show no regard for equality of opportunity. Instead, it will entrench a system of taxation that favours those who have inherited money rather than those who earned it. By making property an even more attractive investment for the wealthy, it could lead to house prices rising even more. And cutting inheritance tax also risks reducing economic growth: a Royal Economic Society study three years ago suggested that increasing inheritance tax while reducing income tax could increase growth by creating greater incentives to work.

Eight years after proposing to do so, George Osborne will finally make good on his pledge to deliver on inheritance tax. The party faithful will be delighted. But the risk for the Conservatives is that the combination of £12 billion of welfare cuts with a tax cut for the wealthiest families will exacerbate their image as the party of the rich.