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Tory inheritance tax plan benefits high earners disproportionately, says IFS Tory inheritance tax plan benefits high earners disproportionately, says IFS
(about 3 hours later)
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 Tories suffered a blow on Sunday when the Institute for Fiscal Studies warned a pledge to raise the inheritance tax threshold on family homes to £1m would disproportionately benefit richer people.
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. The IFS, however, said it would complicate the system. As David Cameron tried to reset the faltering Tory campaign by declaring that he is championing the “Conservative dream”, the IFS described the inheritance tax pledge as “rather odd” special treatment for homeowners.
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.” The criticism from the IFS came as 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 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. The prime minister sought to address criticisms that the Tory campaign is overly negative – and lacking in fiscal credibility – by saying that the pledge to raise the inheritance tax threshold was an example of the “Conservative dream”.
“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.” In an upbeat speech in Cheltenham, Cameron said that raising the threshold would support the “most basic, human and natural instinct” of parents to provide for their children. He said: “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 [your children]. 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.”
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.
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.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 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.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.
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. 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.”
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. Paul Johnson, the director of the IFS, told The World This Weekend on BBC Radio 4: “It is rather odd to give this special treatment to housing given that 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.”
“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. “So we proved our mettle, we proved our ability to stand behind the National Health Service in this parliament.” 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 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. The chancellor had hoped to highlight the announcement during an appearance on The Andrew Marr Show. But he instead found himself under pressure when he was asked about his Guardian article on Saturday in which he pledged an £8bn above-inflation increase in annual spending by 2020.
Paul Johnson, the 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 500,000 people who die each year. In an uncharacteristically uncertain performance, the chancellor declined to spell out how the party would fund the increase and said simply the Tories could deliver the extra funding on the basis of their track record over the past five years and their pledge to deliver higher economic growth.
“It is rather odd to give this special treatment to housing given that 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.” Nick Clegg said: “It shows that they are a party in panic because it is dawning on them – something which has dawned on the rest of the country some time ago – that they are not going to win. Astonishing for the Conservative party, because they have got more money than they know what to do with. They have got more unalloyed and uncritical support from the press than they know what to do with and they are still not going to win the election. So they are thrashing around. One day it is a day’s return to the Big Society, then it is an implausible commitment to NHS funding and now they wheel out a policy which only benefits a tiny number of families across the country.”
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 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 they lacked specifics, unlike Labour which has pledged to introduce an immediate assessment of HMRC’s powers.
Labour said last week it would end the non-dom tax status of millionaires who live in the UK but pay no UK tax on overseas income. Labour believes that the Tories’ failure to follow their move gave the impression that they were defending multimillionaires who are able to avoid paying UK tax on some of their earnings.