Move over, Darling.
In his pre-Budget speech today, the Chancellor, Alistair Darling, announced a change to the Inheritance Tax (IHT) regime which has been universally reported in the press as an “Inheritance Tax Cut”.
Sadly, it is nothing of the kind.
In order to understand what the government has actually done, it is necessary to understand how IHT affects most families.
IHT is a tax charged on the value of a person’s estate at the date of their death. It is charged at a flat rate of 40% on all value over and above the threshold which (this current year) is set at £300,000. Each person has their own threshold and, of course, married couple or civil partners have two between them and although all transfers between spouses (provided they are UK domiciles) are entirely exempt from IHT, when the first spouse dies, one threshold is lost
The effect of IHT then is that of a generational tax, i.e, the burden falls on the children who have to pay the tax on all value over £300,000 when the last surviving parent has died.
The lost threshold can be saved by the expedient of a trust arrangement in the Wills which will preserve both thresholds even after the death of the first spouse and thus enable the surviving spouse to bequeath twice the threshold upon his or her death.
In the current year, two thresholds equals £600,000 – the exact same amount which the government has triumphantly announced as a “tax cut”.
In fact, what the government has done is simply remove the necessity for the trust arrangements in the Wills in order to preserve this extra threshold. It is neither a cut in the rate of the tax or an increase of the threshold level at which the tax bites. It is, it seems, a sleight-of-hand designed to deflect growing pressure for reform of the entire IHT regime while giving an appearance of ‘doing something’.
Some families may experience some marginal benefit from not having to pay the legal and administrative costs of the creating the will trusts but this must be balanced against the cost to those people who have paid good money for such arrangement and will now likely have to pay again in order to undo them.
Of course, single people are left precisely where they were.
The government may feel that it has bounded away from danger without any real cost. They must not be allowed to get away with basking in the misleading press headlines. Pressure must be maintained on the government to substantially and realistically raise the threshold for IHT (so that the burden of it is lifted from the vast majority of ordinary people) or, better still, abolish this iniquitous and wicked ‘generation’ tax completely.
9th October 2007.