IHT threshold: a sop to the Liberal Democrats?

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Lord Carrington once famously observed that a week is a long time in politics. On that scale, six years looks like an eternity

In 2007, George Osborne (who was then shadow chancellor) pledged to increase the inheritance tax nil rate band to £1m. Many regarded this as the point at which the Conservative party began its come-back by disrupting prime minister Gordon Brown’s plans for a snap general election.

The reality is very different from the promise. Notwithstanding the 2007 pledge, the inheritance tax nil rate band has been frozen at £325,000 since 5 April 2009. Prior to that date, it had benefited from an inflationary increase every year since inheritance tax was introduced in 1986.

As recently as the 5th December 2012 Autumn Statement, George Osborne, now chancellor of the Exchequer, proposed to increase the threshold by 1% in 2015/16. Even in the relatively short period since that statement, there has been another twist with the chancellor now determining that the exempt amount will be frozen for a further three years from 2015/16.

Promises of a £1m nil rate band seem like a dim memory and are now seen as a failed electoral promise. So what is behind the latest decision for a further freeze in the threshold?

Raising £100m from a freeze in two years' time seems optimistic

In a move which brings back to mind the prime minister’s earlier thoughts on introducing a “death tax”, continuing to freeze the inheritance tax threshold is justified on the basis that it will help fund care for the elderly. Leaving aside the widespread media comments to the effect that the dead will pay for the care of the living, it is worth examining whether the freeze in the threshold is likely to raise significant funds.

The government thinks that increasing the inheritance tax nil rate band now, in line with inflation at 3%, will generate £100m. There are many different factors affecting the IHT yield for the Exchequer, not least whether property and investment values are rising.

While the cost of living may be increasing, growth in property values on which a large proportion of IHT is paid remain sluggish in many parts of the country.

So, how reliable are HMRC’s figures? HMRC’s own statistics show that, since the original freeze in the threshold, 40% more estates will be caught in the inheritance tax net this year. However, the same statistics also show that the tax take did not increase greatly; this suggests that the only impact has been to create extra paperwork with more estates having to file IHT tax returns.

The IHT tax take actually dropped in the year following the freeze in 2009 and it was not until 2011/12 that it exceeded the pre-freeze levels, and then only by £65m.

So, raising £100m from a freeze in two years’ time seems optimistic.

By comparison, the net NIC and other tax “gain” for the Exchequer once the Single Tier Pension has been introduced is said to be around £6bn. That clearly dwarfs the contribution of IHT in funding the care proposals.

Unless a new angle emerges from the detailed care proposals, it seems that the bulk of the care package will be funded by National Insurance Contributions. Funding the care package seems to have provided the Conservatives with the opportunity to step back from IHT threshold changes, if only to facilitate their continued working in a coalition with Liberal Democrats opposed to high IHT thresholds.

That step back comes at the cost of more form-filling for executors of estates which would otherwise have been exempt from IHT.

 


George Bull, Baker TillyGeorge Bull is head of tax at Baker Tilly


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