Inheritance Tax: the real toll
Inheritance Tax seems to generate a disproportionate amount of anger amongst taxpayers given that so few will ever pay the tax. Our recent comment querying the Conservatives' claim that some four million individuals will be liable for this much disliked tax sparked some swift responses from readers.
The Liberal Democrats have been making their views known too and they are, understandably in this difficult economic climate, not in favour of the Tory pledge to increase the IHT nil rate band to £1 million.
‘It's unbelievable that the Tories are still planning to cut taxes for a handful of millionaires when the majority of people across the country are feeling the squeeze,’ said an outraged Vince Cable, Liberal Democrat Shadow Chancellor. ‘We need fair tax cuts that put money back in the pockets of ordinary people.’
‘The Tory sums simply do not stack up. It is irresponsible and highly misleading for George Osborne to continue to pretend that they do. If Osborne and Cameron can't get these simple sums right how can they possibly be trusted to run the economy?’ He has a point and Citywire’s article was querying the maths too – not on the cost of raising the threshold to £1 million, but on the numbers of individuals the Tories claim will be liable to the tax under the current regime.
This produced angry comments from some readers – and support from others. In answer to the criticisms - it is correct that not all married couples or civil partners can benefit from a partner’s IHT allowance. Only the unused portion of any IHT allowance can be transferred and some individuals – for example a husband or wife with children from a previous marriage – may have used all, or part, of their IHT allowance on death to leave assets to their children. If they used half their nil rate band on death, the estate of the surviving spouse is entitled to the remaining half – at whatever the nil rate band is on the second death.
A spokesman from Her Majesty’s Revenue & Customs says in response to the reader whose spouse died before 1975, ‘the intention of the transfer of nil rate band provisions is to allow any unused IHT nil rate band from the death of the first spouse to be transferred to the estate of the second spouse. The provisions apply where the second spouse died on or after 9th October 2007 regardless of when the first spouse died.’
‘Whether any nil rate band is available to transfer will depend on the value of the estate of the first spouse and how it was distributed. Where the first spouse died before 1975 there was limited or no spouse exemption, so that part or all of the nil rate band may have been used up where the estate passed to the surviving spouse. This will in turn affect the amount of unused nil rate band which may subsequently be transferred to the estate of the surviving spouse.’
It is also true that transfer of the IHT allowance only postpones the tax but it will still potentially take millions of people out of the tax net. This is an important fact when looking at the Tories' claims that four million households are potentially liable to IHT. The figure of only 12,000 people paying IHT for the current year, which was queried by one reader, is from HMRC and comes about because of the introduction of transferable IHT allowances which took more than 3,000 estates out of the IHT net.
The reader who makes the point that it will take decades for four million people to pay IHT is absolutely right - only 560,000 people die a year and of these only 3% pay IHT i.e. 16,800 estates. At this rate it would take many years for four million estates to actually pay IHT. In the meantime anything could happen, thresholds could rise and the tax could be reformed, reduced or even abolished. The Tories claim of four million liable to IHT also takes no account of the avoiding action that many will take.
But why are we even considering giving any tax breaks to those with estates worth a million or more when low income individuals on the minimum wage - who may have no assets at all - are paying 20% income tax and 9.4% National Insurance on earnings of just £12,000 a year, barely above the official poverty level?
A single person with no dependents on the minimum wage of £12,000 a year is not eligible for tax credits and would pay over £1,700 in tax and NI, plus around £1,200 in council tax leaving them with just over £9,000 a year to live on. Unless they live with parents they will pay at least £4,000 a year in rental costs so they have just £100 a week disposable income. Many would be better off on benefits. Do those who want to abolish IHT believe this is fair?
Raising the IHT threshold to £1 million will result in loss of revenue of £1.5 billion according to official figures. If we are going to spend £1.5 billion a year on anybody, it ought to be the lower paid. And there is an economic advantage in doing so. Those with low incomes, many of whom are pensioners, need to spend all their income just to survive. Raising the tax starting point to £10,000 for those on low earnings, as the Lib Dems propose, would put at least £1,000 a year in the pockets of millions of individuals who would go out and spend it - and boost the economy.
And for readers who may think I have an axe to grind I will pay 40% IHT on my estate if I don’t give the money away to my children or grandchildren before I die – and as a divorced mother I don’t even benefit from a husband’s IHT allowance so everything over £325,000 will be taxed.
Extract from Citywire.co.uk
By Lorna Bourke | 10:30:16 | 06 January 2010
