George Osborne has drawn up plans that would allow parents to pass a main property worth up to £1m to their children without paying any inheritance tax, according to Treasury papers leaked ahead of Wednesday’s budget.
The proposed measure would also reduce the inheritance tax bill on properties worth up to £2m by £140,000 and the Treasury analysis concludes that the scheme would “most likely benefit high income and wealthier households”.
In papers marked as sensitive, and seen by the Guardian, it is identified that “those already living in the wealthiest fifth of households are most likely to receive an inheritance”. The tax break would cost the Treasury nearly £1bn and is aimed primarily at southern propertied middle-class households.
The scheme was advanced by the chancellor ahead of the autumn statement, but blocked by the Lib Dems. It is now thought likely to be revived by the Tories within the next fortnight as one of its central election crowd pleasers – although it is not expected to feature as a measure in the budget statement, the last fiscal event of the coalition government.
By 2019-2020, just over 20,000 fewer estates annually would have any inheritance tax liability under the plan.
A government source said: “This looks like a policy to buy more Tory votes to help the wealthy and would be highly regressive in its impact on society.”
The budget is expected to see the chancellor try and defuse Labour’s chief line of political attack by saying his plans no longer involve cutting public spending as a proportion of GDP to their lowest level since the thirties.
Prior to the budget, David Cameron and Nick Clegg also announced that the national minimum wage will increase by 3% to a new rate of £6.70 an hour, effective from October 2015. This is the largest real-term increase in the minimum wage since 2008, with over 1.4 million of Britain’s lowest-paid workers set to benefit.
The inheritance tax plan, drawn up under the direct guidance of the Treasury financial secretary David Gauke, and with the agreement of the chancellor, involves the creation of a new tax-free band worth £175,000 per person on a family home. It can transferred between married couples, making it worth a maximum of £350,000.
The new nil rate band would apply to the value of a family home or other main residence transferred to a direct descendant of the deceased, including step children and adopted children. Other family members would not be able to benefit.
In those circumstances, the new threshold would then be added to the existing inheritance tax threshold, where no tax is paid for the first £325,000 on the value of an estate. At present tax is paid at a rate of 40% after the first £325,000 – a sum that can also be transferred between married couples making that worth £650,000 – which applies to property and any other assets in an estate.
The Treasury paper shows as a result of the proposal it is possible that no inheritance tax would fall due on qualifying properties worth up to £1m – depending on the value of the rest of the estate. The £1m figures comes from adding to together the existing £650,000 maximum with the new maximum £350,000 relief.
That would be a saving of £140,000. On a property worth £1.5m, the inheritance tax bill could fall from the current average to £340,000 to £200,000.
Officials writing the paper believe that the proposal “will generally be very popular with the public and in the media. It will allow you to say you are exempting those with modest homes from inheritance tax (with up to £1m of assets) exempted in certain circumstances”.
The document, written for Gauke, continues: “You have indicated a desire to reduce the burden of inheritance tax. Having considered the cost of of a substantial increase in the existing nil rate band you and the Chancellor have indicated you would like instead to introduce a more targeted measure to allow the family home to be passed onto the children of deceased without it leading to an inheritance tax liability.
“This reflects the concern raised by the public about rising house prices increasingly leading to estates with a modest house particularly in London and the south-east paying inheritance tax.”
The benefit of the exemption would be removed or reduced altogether though a taper for estates worth more than £2m, meaning some estates would be paying substantially more.
Overall by the end of the next parliament the number of estates subject to an inheritance tax liability would be 34,300 or 6.2% of total deaths, if the proposal was adopted, instead of the projected 56,100 estates or just over 10%.
The number of properties subject to inheritance tax has risen due to a government refusal to raise the inheritance tax threshold alongside rising house prices. Inheritance tax was first introduced in 1986.
The paper reveals the regional inequality in the plans pointing out those most benefitting from the new nil rate band will be in areas such as London and the south-east, whereas those in areas like Northern Ireland, for example, will be much less affected because only 200 estates each year currently have an inheritance tax liability there.
The paper says there are not strong economic arguments for introducing an inheritance tax exemption specifically related to main residences.
The civil service predicts a series of drawbacks, including further incentivising owner occupation.
However, the paper warns “people will increasingly concentrate the value of the assets in their estates in the main residence, pushing up its value. It will also push up house prices and possibly rents.
“There is unlikely to be a corresponding increase in housebuilding because housing supply in the UK is price inelastic so this will make it more difficult for younger households to buy a house.”
It also warns the measure “could lead to inequitable incomes since estates worth the same or more but with a greater proportion of the total value in the main residence could pay less tax than those with estates worth less but with a greater proportion in other assets”.
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