Why time is running out to save Britain from inheritance tax - THE TELEGRAPH
BY Charlotte Gifford
Chancellor Jeremy Hunt could spare half of grieving families from the pain of inheritance tax if he raised the threshold by just £175,000, new analysis reveals.
The Prime Minister and Mr Hunt are under increasing pressure to lift the death duty burden as a deep freeze on tax thresholds and rising property prices drag thousands more families into the trap.
Telegraph Money is calling on the Government to abolish the tax ahead of the Autumn Statement later this month, and more than 50 Conservative MPs have backed the campaign.
Analysts today warn that the Government is running out of time to act before a predicted Labour landslide at the next general election, which is likely to be held next year.
The tax is widely considered to be Britain’s most hated levy and is increasingly hitting ordinary families as the super-rich exploit complicated and wide-ranging exemptions.
One in eight families will soon face inheritance tax bills if the Government does not take action, according to analysis by the Institute for Fiscal Studies.
Today 4pc of deaths result in a tax charge but soaring asset prices will see this rise to 12pc by 2032-33, the think tank said, eventually costing bereaved families £15bn a year.
For months the Government has been considering slashing the 40pc tax in a bid to win voters ahead of the next general election.
Chris Etherington, of tax firm RSM, said: “The clock is ticking for the chancellor now to have any meaningful impact on the general election result.
“He finally has some fiscal headroom and he is going to be under huge political pressure to utilise it.”
Calls for tax cuts have grown louder this week after it emerged that the Government has twice as much “fiscal headroom” as was expected in the spring.
The Resolution Foundation calculates the Chancellor has around £13bn to play with, up from an earlier estimate of £6.5bn.
Two humiliating defeats in the by-elections have only piled more pressure on the Chancellor, who has previously ruled out slashing taxes until inflation is under control.
Under the Tories, inheritance tax is no longer reserved for the super-rich. As house prices have surged, it has grown into a tax on Britain’s middle classes.
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Today, homeowners in Greater London, Surrey, Hertfordshire and Hampshire are among the most likely to pay the divisive levy, according to analysis by the wealth manager Investec, which found these counties have the highest number of properties worth £1m or more.
Andy Butcher, of wealth manager Raymond James, said inheritance tax is “punitive” for baby boomers who bought properties for very little in the 1990s that have since rocketed in value.
Individuals who pass away with less than £325,000 in their estate pay no inheritance tax, however under current plans this tax-free allowance is frozen until 2028.
The IFS’s analysis shows that even if tax bands are uprated with inflation in five years’ time, inheritance tax receipts will nonetheless keep rising as older generations accumulate more wealth.
Despite a property market downturn, house prices continue to surge in some of Britain’s most sought-after areas. Homes in Richmond worth £1m or more have grown 8pc in value year-on-year, while high-end properties in Bath saw a 20pc leap.
Giving away wealth during your lifetime is one of the best ways to cut your inheritance tax liability. But that is not an option for those whose wealth is mostly tied up in their properties, Mr Butcher said.
He said: “If your home is your biggest asset, you have fewer options for reducing the size of your estate compared to those with mostly liquid assets. Families may be forced to sell their home.”
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Scrapping the tax, he continued, would allow thousands of families to pass on more wealth to their children. “We know millennials have been particularly squeezed over the last decade. This would help make the next generation better off.”
However, the Chancellor will be reluctant to forfeit £7bn a year in annual revenue at a time when the public purse is under significant strain.
This has led to growing speculation that Mr Hunt may instead choose to amend the tax.
Shaun Moore, of the wealth manager Quilter, said: “Making moves to modernise inheritance tax could be a real ‘rabbit out of the hat’ moment for Jeremy Hunt at the Autumn Statement.”
Former chancellor George Osborne said earlier this year that the inheritance tax thresholds should be updated alongside inflation, to prevent more families from being caught in the net.
Others have called for the tax to be simplified. The now-disbanded Office for Tax Simplification, a government agency, said in a 2019 report that it had found many areas where the tax created “distortions” and was difficult to understand.
One of the areas it deemed “most complex” was the residence nil-rate band, an extra £175,000 exemption for homeowners who pass their property on to their children.
Although it allows couples to pass on up to £1m to their children, the allowance cannot be used by the single or the childless, meaning a significant portion of the population are forced to pay higher tax bills.
One option would be to simplify the tax by raising the £325,000 nil-rate band to £500,000 and scrapping the residence nil-rate band, which would almost halve the number of families paying inheritance tax each year, according to Quilter.
By 2027-28, fewer families (around 25,000) would pay inheritance tax than in 2020-21, the most recent year for which HM Revenue and Customs has full data, when 27,000 paid the charge.
Mr Moore said this would “remove complexity from an area of taxation desperately in need of simplification while not costing the Government a huge amount over the long term”.
Quilter estimates it would cost around £1.4bn in lost revenue annually.
Another option would be to reduce the 40pc rate. Britain has one of the highest inheritance tax rates in the world. Bringing this down would soften the blow for thousands of families, who currently pay an average bill of £214,000.
However, dropping the rate would not be cheap. Even lowering it to 30pc would cost the Government £7.7bn between 2024-25 and 2027-28, the wealth manager estimates.
Mr Moore said: “Despite inheritance tax being paid by only 4pc of the nation it is a tax that many people find egregious.
“Therefore, any changes could help garner the Conservatives some much needed popularity ahead of next year’s general election.”