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Briefing: What is the government doing to inheritance tax?

11 February 2013

The Death Tax has risen again. The government estimates that its proposals for social care funding will cost the Treasury £1 billion a year. That will be met through a combination of not compensating government departments for the higher National Insurance contributions they will have to pay under the new single-tier state pension and freezing the level at which inheritance tax kicks in at £325,000 until 2019 – the source of the ‘death tax’ accusations today.

Freezing the inheritance tax threshold

The inheritance tax threshold (or ‘nil-rate band’) is the amount of an estate that is not taxed. It rose in both cash- and real-terms throughout the Labour years, but in 2009 Alistair Darling decided to freeze it at £325,000 for 2010-11. And in his final budget in March 2010, Darling decided that it should stay frozen until 2014-15.

George Osborne did not change those plans, but in his 2011 budget he said it would rise in line with CPI inflation from 2015-16 onwards. Then in his autumn statement  two months ago he decided it should rise by only 1 per cent in 2015-16 instead. Before today’s announcement, the threshold would have risen to around £350,000 in 2018-19. But now, the government has chosen to keep it at £325,000 until then.

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The real-terms effect of today’s announcement is to lower the threshold by about £20,000 (6.7 per cent) in today’s money by 2019. All of the measures together will mean that the threshold will be about £60,000 (17.5 per cent) lower in 2019 than it was in 2009-10, in today’s money.

According to HMRC, a £5,000 rise in the threshold saves about £50 million, so this £20,000 real-terms rise should save around £200 million. That agrees with the government’s claim that 20 per cent of the £1 billion social care cost is being met through the inheritance tax rise and 80 per cent through the National Insurance changes (which are effectively extra departmental cuts of around £800 million).

BUT Darling effectively doubled the threshold for married couples

In order to counter the Tory proposal to raise the threshold to £1 million, Darling used his 2007 pre-budget report to make the tax-free allowance transferable between spouses or civil partners. This means that, if someone leaves their estate to their spouse (and therefore doesn’t pay inheritance tax on it), the spouse then has a tax-free allowance of £650,000, rather than £325,000. In 2019, this doubled allowance will still be worth about £250,000 (76 per cent) more, in today’s prices, than the allowance was before Darling made it transferable in 2007.

Inheritance tax affects very few people

Of the roughly 560,000 deaths in 2009-10, inheritance tax was paid on the estates of just 14,600 — or 2.6 per cent.

And tax was paid on just 4,700 estates worth between £325,000 and £500,000 — each of which paid about £27,000 on average. In fact, 68 per cent of inheritance tax receipts came from estates worth £1 million or more.

The 14,600 estates that did pay inheritance tax were, on average, worth £875,000 (including £329,000 in residential property, £253,000 in securities and £190,000 in cash) and paid, on average, £163,000 — an effective tax rate of just under 19 per cent.

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Show comments
  • John Cronin

    Only 2.6% of estates were affected? that just does not seem intuitively feasible to me. You drive through London for mile after mile and see (not necessarily posh, just middle class areas) where every house is over £600,000. Maybe I’m just Londoncentric, but it seems small. Possibly the reason for such a small figure is that a lot of people just use the various methods trusts, handover before death, PETS, to defeat it. They don’t call it the voluntary tax for nothing.

    Prior to Alistair darling bringing in the joint threshold – which for a married couple effecitivley raised it from £300K to £600 – the % in the South East must have been hitting 25-30% with the bizarre price of property.

  • michael

    Freezing the threshold is one thing but raiding ‘nest’ (according to JH) before it has even started to grow quite another . Turning a compulsory pension pot asset into merely a payroll tax and no doubt claiming that despite its obvious cost to employers it wont affect a ‘too good to be true’ buoyant jobs market, completely misunderstands an employers attitude to ‘bearable’ cost.

    Try selling this raid on their pension and the inevitable erosion of job security to employees who have the option to opt out.

    -I love the simplicity of the jobs numbers …1 million 3k p/a full time apprentices =1million new jobs.(on the cheap)

  • HooksLaw

    Personally I would fund social care charges by taxing thick lefty unfunny stand up comedians at 95%.

    • Robert_Eve

      You could probably clear the National Debt that way!!

  • Smithersjones2013

    More looting of corpses by the government? Quel surprise…..

    Of course the issue really isn’t about the statistics of it but the anti-family principle that it infers because it will be the offspring of couples that will be primarily penalised. For the third time in so many weeks Cameron and co have surreptitiously attacked the institution of the family

  • toco10

    Osborne must be replaced within the next six months if Cameron wishes to ensure the inept Ed Miliband does not get his hands on the British Economy.Osborne has done many things fairly and honestly but his manner and lack of elector appeal is worrying.

    • Smithersjones2013

      but his manner and lack of elector appeal is worrying.

      And you really think after 5 years of u-turns, deception, divisiveness and broken commitments Cameron will still have elector appeal?

      • lee taylor

        Well he’s out polling everyone at the moment.

        • George_Arseborne

          Oh President Cameron? Secret weapon. Well this is UK. Parliamentary not Presidential. The stupid question is who will make the best PM? Of course him because he is at present the PM. So why excited by him iut polling his own party? Tha does not count

          • Nicholas chuzzlewit

            I think some kind of remedial English class is in order. The rest of us might then have some understanding of whatever point it is that you are trying to make.

    • George_Arseborne

      Therefore who is inept? What a desperate word?

  • lee taylor

    All this fuss over a tax that 97% of the public don’t pay.
    I don’t it.

    • telemachus

      And why should they pass their wealth on anyway?

      • fantasy_island

        Er, because it’s theirs and they wish to.

        • Colonel Mustard

          Come on. You can’t expect a communist troll who admires Stalin, excuses Katyn and does not believe in the indigenous birthright of the English to respect the private property of families.

          • Andy

            Pity he can’t enjoy one of Stalin’s Gulags. He would never be seen again.

            • Nicholas chuzzlewit

              I think you will find that it is ‘them’ rather than ‘he’. Telemachus is one of the pseudnyms used by the Labour Party rapid rebuttal unit. The idea is that they say something outrageously foolish and provocative thereby derailing sensible debate as we all expend energy denouncing their collective stupidity. My favourite is the ‘Charismatic Superstar’ nomenclature that they apply to Ed Balls in the full knowledge that it will drive sensible people mad. We all know that he is unprincipled, dishonest and incompetent but the Telemachus gang know that it is perfect for stifling debate. Try and ignore these Trolls. .

          • Nicholas chuzzlewit

            Well said Colonel. Also, at a practical level, you cannot expect such a stupid group of people as Telemachus to hold down a decent job and accumulate any wealth to pass on to anybody.

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