IHT – Why The Tories Want To Cut Death Taxes

Prime Minister David Cameron’s proposal to raise the inheritance tax threshold to £1 million should come as no surprise to anyone familiar with Tory tax policy.

The Tories came into power with a pledge to raise the inheritance tax threshold from £325,000 for an individual to £1 million but had to put the promise on hold when thrashing out a coalition deal with the Lib Dems.

IHT is a small tax generator for the government – raising about £3.1 billion for the Treasury in 2012.

The problem with IHT is the tax is designed to extract cash from the wealthy, but is linked to house prices, which make up the bulk of most ordinary taxpayer’s estates. As house prices rise, more families pay inheritance tax.

Many resent paying tax twice – once on their income earned to buy their homes and then again on the same money converted into property when they die.

Scrapping death taxes

From a Tory policy viewpoint, reducing the number of people that pay IHT is a no-brainer and follows their strategy of low tax on income but more indirect taxation when spending the money.

For Labour, raising the IHT bar is a difficult policy to match because the idea does not fit their strategy of redistributing wealth from the financially better-off to pay for social policies for the less fortunate.

Research by accountancy firm UHY shows many major economies favour scrapping death taxes completely.

China, Russia, India, Australia, Israel and New Zealand have no inheritance taxes, while the United States has a threshold of £3.275 million before tax is charged at the same 40% rate as in the UK.

Only one developed economy charges more IHT then Britain – that’s Ireland.

Wealth warning

Many governments discourage death taxes because they are a dampener on wealth creation.

Ladislav Hornan, a managing partner at UHY said: “IHT bills cut the incentive to create wealth and to pass that wealth on to family or loved ones.  The tax can also deprive the next generation of money that traditionally has funded new businesses.

“That is why developed economies like Australia have scrapped IHT, while emerging economies have never imposed them.”

The UHY research revealed that European countries take the biggest cut of inheritance taxes from their citizens, with European Union nations grabbing 15% tax on the inheritance of a property valued at £1.8 million, almost double the global average of 8%.

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