Tory inheritance tax plan benefits high earners disproportionately, says IFS

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The Tories suffered a blow on Sunday when the Institute for Fiscal Studies warned that a pledge to raise the inheritance tax threshold on family homes to £1m would disproportionately benefit richer people.

As David Cameron tried to reset the faltering Tory campaign by declaring that he was championing the “Conservative dream”, the IFS described the inheritance tax pledge as “rather odd” special treatment for homeowners.

The criticism from the IFS came as George Osborne failed on nearly 20 occasions to explain how the Tories would fund a commitment to provide an extra £8bn a year to the NHS by 2020.

The prime minister sought to address criticisms that the Tory campaign is overly negative – and lacking in fiscal credibility – by saying that the pledge to raise the inheritance tax threshold was an example of the “Conservative dream”.

In an upbeat speech in Cheltenham, Cameron said that raising the threshold would support the “most basic, human and natural instinct” of parents to provide for their children.

He said: “You want to know that even after you’re gone, when you’re not on the phone and not physically there, you can still provide for [your children]. That wish to pass something on is about the most basic, human and natural instinct there is. And that’s why for a long, long time I have wanted to act on inheritance.”

Under the current rules, inheritance tax is charged on estates worth more than £325,000, rising to £650,000 for couples because the rate is transferable between those who are married or in civil partnerships. The Tory plan would raise the rate to £500,000 by introducing a new zero-rate band of £175,000 on a main property. This would create a £1m limit for couples because it would also be transferable.

The proposal, outlined by the prime minister in an interview with the Sunday Times, would be paid for by reducing the tax relief on pension contributions on incomes between £150,000 and £210,000 from £40,000 to £10,000.

In an observation published after the Tory announcement, the IFS said: “Since the children of those with very large estates are disproportionately towards the top of the income distribution, the gains from this [and in fact any] IHT cut will also go disproportionately to those towards the top of the income distribution.”

Paul Johnson, the director of the IFS, told The World This Weekend on BBC Radio 4: “It is rather odd to give this special treatment to housing given that owner-occupied housing is already extremely tax privileged. This will only increase the bias we have towards putting your money in a house, to inflating potentially the value of housing, without dealing with the lack of housing, which is driving up the value of private residences.”

The IFS also cited a Treasury document leaked to the Guardian last month, which concluded that increasing the inheritance tax threshold would “most likely benefit high income and wealthier households”.

The chancellor had hoped to highlight the announcement during an appearance on BBC1’s The Andrew Marr Show. But he instead found himself under pressure when he was asked about his Guardian article on Saturday in which he pledged an £8bn above-inflation increase in annual spending by 2020.

In an uncharacteristically uncertain performance, the chancellor declined to spell out how the party would fund the increase and said simply the Tories could deliver the extra funding on the basis of their track record over the past five years and their pledge to deliver higher economic growth.

Liberal Democrat leader Nick Clegg said: “It shows that they are a party in panic because it is dawning on them – something which has dawned on the rest of the country some time ago – that they are not going to win. Astonishing for the Conservative party, because they have got more money than they know what to do with. They have got more unalloyed and uncritical support from the press than they know what to do with and they are still not going to win the election. So they are thrashing around.

“One day it is a day’s return to the ‘big society,’ then it is an implausible commitment to NHS funding and now they wheel out a policy which only benefits a tiny number of families across the country.”

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This article was written by Nicholas Watt Chief political correspondent, for theguardian.com on Sunday 12th April 2015 10.47 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010