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Inheritance tax pledge kickstarts Tories' attempt to revive election campaign Tory inheritance tax plan benefits high earners disproportionately, says IFS
(about 4 hours later)
The Tories will support the “basic human instinct” of parents to provide for their children by ensuring that family homes worth £1m will be taken out of inheritance tax, George Osborne has said, as the Tories moved to revive their general election campaign after a bumpy week. A Tory proposal to raise the inheritance tax threshold on family homes to £1m would disproportionately benefit people on higher incomes, the Institute for Fiscal Studies has said.
The chancellor said only millionaires would pay inheritance tax under the plan. “Conservatives support the basic human instinct to provide for your children. We believe that your home which you worked for and you saved for should belong to you and your family not the taxman. So we will take family homes out of inheritance tax, we will effectively increase the inheritance tax threshold to £1m so that only millionaires pay inheritance tax, as originally designed for that tax,” he said on BBC1’s Andrew Marr Show. David Cameron said the proposal to raise the threshold would support the “most basic, human and natural instinct” of parents to provide for their children. But the IFS said it would complicate the system.
Harriet Harman, Labour’s deputy leader, said the Tories had the wrong priorities. “The Tories are helping a few people and we want everyone to be better off,” she told Marr. In an observation published after the Tory announcement, the IFS said: “Since the children of those with very large estates are disproportionately towards the top of the income distribution, the gains from this (and in fact any) IHT cut will also go disproportionately to those towards the top of the income distribution.”
Osborne struggled to explain how the Tories would fund their pledge to plough an extra £8bn a year into the NHS, revealed by Osborne in the Guardian on Saturday. “It’s part of our balanced plan,” said Osborne, when asked where the money was coming from. The Tories hope the inheritance tax pledge will revive their flagging election campaign. In a speech in Cheltenham on Sunday morning, Cameron said: “Everything you do is for your children. You’ve got this huge responsibility not just to love them but to provide for them. And though my children are still small, I know that never goes away, that when they’re in their 20s, 30s, 40s, that desire to be there for them is as strong as ever.
Marr suggested the money would have to come from deeper cuts in departments not covered by ring-fenced spending pledges, such as police, defence and local government. “We have to make similar savings each year, as we’ve made in the five years of this parliament for two years. Let’s finish the job,” said Osborne. “And yes, you want to know that even after you’re gone, when you’re not on the phone and not physically there, you can still provide for them. That wish to pass something on is about the most basic, human and natural instinct there is. And that’s why for a long, long time I have wanted to act on inheritance.”
Harman said the promise was “illusory” and that Tory spending plans represented a “real threat” to the NHS. The Tories say their proposal is aimed at Middle Britain voters who have saved up over decades to own a home. They say the plan would benefit 22,000 families a year.
She focused on a Labour announcement that it would introduce emergency laws intended to raise more than £7.5bn a year in a crackdown on tax avoidance and evasion. Ed Balls, the shadow chancellor, said Labour would close loopholes that were being ignored by the Tories. Under the current rules, inheritance tax is charged on estates worth more than £325,000, rising to £650,000 for couples because the rate is transferable between those who are married or in civil partnerships. The Tory plan would raise the rate to £500,000 by introducing a new zero-rate band of £175,000 on a main property. This would create a £1m limit for couples because it would also be transferable.
The Conservatives outlined their biggest tax announcement of the election campaign so far when they pledged that parents would be able to pass on homes worth £1m to their children free from inheritance tax. The move will revive memories of a similar announcement by Osborne in 2007 which spooked Gordon Brown into abandoning plans for an early election. The proposal, outlined by the prime minister in an interview with the Sunday Times, would be paid for by reducing the tax relief on pension contributions on incomes between £150,000 and £210,000 from £40,000 to £10,000.
David Cameron made clear that the Tory plan was aimed at Middle Britain voters. He told the Sunday Times: “What this effectively does is take the family home out of inheritance tax. That is the right thing to do. This is a tax that is meant to be paid by the rich and not by hard-working families who have saved to buy a home and improve it. That wish to pass something on is about the most basic, human and natural instinct there is.” Separately, the Tory campaign ran into trouble on Sunday when George Osborne failed on nearly 20 occasions to explain how the Tories would fund a commitment to provide an extra £8bn a year to the NHS by 2020.
The Tories say the plan will benefit 22,000 families a year. Under the current rules, inheritance tax is charged on estates worth more than £325,000, rising to £650,000 for couples because the rate is transferrable between couples who are married or in civil partnerships. The Tory plan would raise the rate to £500,000 by introducing a new zero-rate band of £175,000 on a main property. This would create a £1m limit for couples because it would also be transferable. In an uncharacteristically uncertain performance on the Andrew Marr Show on BBC1, the chancellor declined to spell out how the party would fund the increase and said simply that the Tories could deliver the extra funding on the basis of their track record over the last five years and their pledge to deliver higher economic growth.
Labour believes that its plan to raise an extra £7.5bn to help pay down the budget deficit shows the party is adopting a more prudent approach. Ed Balls told the Observer of the £7.5bn target, due to be met halfway through the parliament: “We will close loopholes the Tories won’t act on, increase transparency, toughen penalties and abolish the non-dom rules. And our first budget will make sure that following an immediate review of HMRC, it has the powers and resources it needs to come down hard on tax avoidance and evasion.” “We have a track record in this parliament where we found almost £8bn extra in real terms for the NHS in very, very difficult economic circumstances,” Osborne said after he was asked about his Guardian article on Saturday in which he pledged an £8bn above-inflation increase in annual spending by 2020. He added: “So we proved our metal, we proved our ability to stand behind the National Health Service in this parliament.”
The chancellor tried to focus on the party’s biggest tax announcement of the election campaign so far, on inheritance tax. The move will revive memories of a similar announcement by Osborne in 2007 which spooked Gordon Brown into abandoning plans for an early election.
But Paul Johnson, director of the IFS, questioned the policy. He told The World This Weekend on BBC Radio 4: “It is only a very small proportion of all estates who will be affected. Less than 10% pay inheritance tax at all at the moment. This particular change will probably reduce the inheritance liabilities of between 20,000 to 30,000 estates each year. That is out of half a million people who die each year.
“It is rather odd to give this special treatment to housing given the owner-occupied housing is already extremely tax privileged. This will only increase the bias we have towards putting your money in a house, to inflating potentially the value of housing, without dealing with the lack of housing which is driving up the value of private residences.”
The IFS also cited a Treasury document leaked to the Guardian last month, which concluded that increasing the inheritance tax threshold would “most likely benefit high income and wealthier households”. The IFS said: “Many features of the policy are similar to one analysed in a Treasury document that was leaked to and published by the Guardian last month.”
Johnson said cutting tax reliefs on pensions for higher earners would discourage saving. He said: “It will leave higher earners, those earning over £150,000 a year, with very little they are able to put into a pension free of tax. That obviously increases the effective marginal tax rate on incomes above £150,000. It is worth less to you to earn more, so that has to have some damaging effects on work incentives as well as on savings incentives.
“What we have here is something which is taking money from people who are earning at the moment and giving it to people who are inheriting – so in a sense taking from high earners and giving to those who are living off the unearned incomes which are left to them by their parents.”
Harriet Harman, Labour’s deputy leader, said the Tories had the wrong priorities. “The Tories are helping a few people and we want everyone to be better off,” she told Marr. Harman said the promise was “illusory” and that Tory spending plans represented a real threat to the NHS.
She focused on Labour’s announcement that it would introduce emergency laws intended to raise more than £7.5bn a year in a crackdown on tax avoidance and evasion. Ed Balls, the shadow chancellor, said Labour would close loopholes that were being ignored by the Tories.
Labour believes that its plan to raise an extra £7.5bn to help pay down the budget deficit shows the party is adopting a more prudent approach. Balls told the Observer of the £7.5bn target, due to be met halfway through the parliament: “We will close loopholes the Tories won’t act on, increase transparency, toughen penalties and abolish the non-dom rules. And our first budget will make sure that following an immediate review of HMRC, it has the powers and resources it needs to come down hard on tax avoidance and evasion.”
The Tories have said they will raise an extra £5bn in tackling tax avoidance and tax evasion. But Balls said the Tories lacked specifics, unlike Labour which has pledged to introduce an immediate assessment of the powers held by HMRC.The Tories have said they will raise an extra £5bn in tackling tax avoidance and tax evasion. But Balls said the Tories lacked specifics, unlike Labour which has pledged to introduce an immediate assessment of the powers held by HMRC.
Labour said last week it would end the non-dom tax status of millionaires who live in the UK and pay no UK tax on overseas income. Labour believes that the Tories’ failure to follow their move on non-doms gave the impression that they were defending multimillionaires who are able to avoid paying UK tax on some of their earnings.Labour said last week it would end the non-dom tax status of millionaires who live in the UK and pay no UK tax on overseas income. Labour believes that the Tories’ failure to follow their move on non-doms gave the impression that they were defending multimillionaires who are able to avoid paying UK tax on some of their earnings.