It amounts to a £1bn subsidy to the property market in London and the South Eastby Rachel Reeves / March 15, 2017 / Leave a comment
A fair tax system should tackle unjust distortions in the way that wealth is distributed, in an economy that works for everyone. But in last week’s budget, Chancellor Philip Hammond announced that he will plough on with his predecessor’s planned £1bn cut to inheritance tax. This will only serve to entrench further a blatantly unfair policy.
Death duties on estates or individuals have been around in some form since at least the 17th century, in various guises including probate duty, legacy duty, succession duty, estate duty and capital transfer tax. The latest incarnation, inheritance tax (IHT), was introduced in 1986. Its changing forms reflect the sensitivities around this transfer tax, which has proved too easy to avoid for those with good accountants and lawyers.
At present, IHT is charged at 40 per cent on the portion of an individual’s estate that is above the threshold of £325,000. That allows a couple to pass on a £650,000 estate free of tax. Under its plan, the government will gradually raise the individual threshold to £500,000, allowing a couple to pass on a £1m property or estate free of IHT by 2020.
Those fortunate enough to have been born into well-off families are set to enjoy a significant windfall in unearned income. But a time when the NHS faces a funding crisis and more money is desperately needed for social care, is this the right priority for a government that claimed it would focus on those who “just about managing”?
I commissioned independent statisticians in the House of Commons library to examine which areas would benefit from the tax break. Given that the main asset in most large estates is the family home, they looked at property sales across Britain over the last two years using Land Registry data.
Unsurprisingly, 96 of the top 100 constituencies for homes that cost £650,000 or more were in London and the South East. The remaining four were in Conservative-held seats including Tatton, the constituency of former Chancellor George Osborne, who originally proposed the cut in inheritance tax. In Prime Minister Theresa May’s Maidenhead constituency, 20.1 per cent of homes were sold for at least £650,000; in Hammond’s Surrey seat of Runnymede and Weybridge, 18.3 per cent were.
Yet, in my Leeds West constituency, just six homes were sold above that threshold in 2015 and 2016, representing 0.2 per cent of sales. It is a similar story across the north, Wales, Scotland, Northern Ireland and large parts of England.
Under the planned cuts, the projected number of taxpaying estates will fall from 63,000 to just 37,000 by 2020-21. That leaves 26,000 estates, which could each benefit by around £38,400. The estate of a married couple worth between £1m and £2m would gain up to £140,000, according to the Institute of Fiscal Studies. Overwhelming, the beneficiaries will be located in the south, deepening its divide from the north. The cost of the inheritance tax break is little more than a £1bn subsidy to the property market in London and the South East, which will make it even harder for young people to find an affordable home to buy or rent.
The cut in IHT is a flawed proposal that illustrates the government’s misguided set of priorities. This money would be far better spent on early years education and investing in all our children, not just the privileged ones. The cuts in corporation tax are equally wrong at a time when more than one in five people are being paid below the minimum wage.
If we are to have a just tax system, the chancellor needs to make sure that everyone—especially those with the broadest shoulders—pay their fair share. He should rethink his unwarranted and unacceptable inheritance tax giveaway. The offspring of the rich should be just as prepared to pay tax as the rest of us.