Louise Cooper

The truth behind David Cameron’s new inheritance tax policy

The truth behind David Cameron's new inheritance tax policy
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David Cameron's new Inheritance tax policy is clearly an important political message of aspiration and family values rather than a policy that will either help many or actually have much fiscal impact. The OBR has numbers on death rates and estates subject to the tax: just under 600,000 people died in 2013/14 and only 5 per cent of those had estates that were liable to inheritance tax. So that is just over 26,000 deaths in one year whose estates paid inheritance tax.

According to the Telegraph, Cameron's policy would only begin in 2017, two years into the next parliament. So three years of this policy and on 2013/14 rates this will only effect about 80,000 estates. On the face of it not a huge vote winner then.

And of course it relies on Cameron getting into power with either a majority or a coalition partner willing to agree to it. The Lib Dems have not allowed the Tories to raise the inheritance tax threshold in this parliament and it has been stuck at £325,000 for six years. So the Inheritance Threshold has not even increased with inflation!

Inheritance tax has already dragged more and more of the 'middle classes' into its net.

And the OBR figures show this will continue. Under current policies, the OBR estimates that, far from protect people from inheritance tax, Osborne's polcies would double the amount of deaths that will be subject to it - to 9.9% of all deaths by 2018/19.

Inheritance tax is no longer for the privileged elite aristocracy but paid by an increasing number of estates.

HMRC publishes how much Inheritance Tax actually raises: in 2013/14 IHT raised £3.4bn. Not a huge amount in the context of a £1.4-1.5rn debt mountain. However it has gone up from £2.4bn in 2009/10. A substantial increase of that additional £1bn was due to rising residential property prices. A third of all IHT according to the HMRC comes from residential property. As property prices rise, more and more estates are dragged into paying IHT. And this is why this is a policy for aspiration. Although the vast majority of estates — 95 per cent — are not subject to IHT - voters' fear that if house prices continue to rise, their children will have to pay IHT.

And it can be a big chunk of cash. Its charged at 40 per cent. Other countries like France and Germany have various rates depending on how much is inherited and by whom. But in the UK there is a flat and high rate of 40%.

So this is a policy that is not likely to affect many people — about 100,000 in the next parliament depending on your estimates for house prices.

But what it does send is a clear political message. That if 'you've done the right thing' according to Cameron and bought your own house, you should be able to leave it to your children tax free. Of course there are great swathes of the country who cannot afford to do the 'right thing' and buy a house as property has become increasingly unaffordable. (but let's ignore that for the time being).

In terms of cash, it will probably cost less than £1bn — the rise on IHT in the last few years. Not an enormous amount but it does come the day after the Conservatives pledged to fund the NHS gap of £8bn a year. I question if these polices are properly costed and funded. Even more so as the £12bn of welfare cuts have not been properly explained as yet. I am beginning to fear that policy is being made slightly on the hoof with increasingly populist messages about spending to try to appeal to as many voters as possible.

As the opinion polls show no obvious winner, all parties are getting desperate.

The Tories are saying this policy will be funded by reducing the pension tax benefits for those earning over £150,000 a year. Will this though be enough? You can always cut your wages to pay more into a pension to get round that idea.

The British are obsessed with their homes, their value and increasingly buy to let. Buying a home normally takes 25 years - it is the single biggest purchase of most households. It is a large emotional connection - it is a home to bring up children and a place to live. It is not like buying a pension. And that is why this is a smart political policy. it appeals to voters' emotions - the stong desire to pass on the family home.

Politically Labour are offering the South East of the country a London three bedroom terrace (or in Miliband speak a 'mansion') tax to pay for nurses in Scotland. On the other hand, the Tories are promising voters they can leave a £1mn property tax free to the next generation. Although most families do not own a property worth that much, they will fear that when they die, property prices may have risen so far that they will. Voters also rightly fear that the inheritance tax threshold will not increase with rising property prices. The South East of England had a population of 8.5mn in the 2010 consensus. That is an awful lot of voters for the Tories to appeal to on housing.