The Time is Right to Raise the Inheritance Tax Threshold
The Conservative Party is facing an uphill battle going into the next general election. Trailing Labour by over 20 points in the polls, they desperately need a narrative-changing policy to turn around their political fortunes. Raising the inheritance tax threshold to £1 million could provide that lifeline, argues a growing chorus of Tory backbenchers.
Inheritance tax has long been unpopular with middle-class families, who face being hit with 40% tax bills when property prices have surged far above the tax-free allowances. These have been frozen at £325,000 per person since 2009, pulling more and more families into the tax net.
South Cambridgeshire MP Anthony Browne, who chairs the influential Backbench Treasury Committee, believes increasing the threshold to £1 million could have the same electoral impact it did in 2010. He advised then-shadow chancellor George Osborne to make it a central plank of their manifesto. The Conservatives duly won that year’s election against Gordon Brown’s Labour government.
Browne argues the biggest support would come from older middle-class voters, who the Tories desperately need to win over. Property is often the main asset for these families when the children have moved out. This contrasts with the super-rich, who can more easily avoid inheritance tax through complex financial planning and offshore trusts.
Other Conservative MPs are going even further and calling for the complete abolition of inheritance tax, joining The Telegraph’s own campaign on this issue. They argue it raises the relatively small sum of £7.1 billion annually, but causes widespread resentment and distorts financial behavior. Families employ all sorts of questionable schemes just to avoid the taxman.
With a growing number of countries scrapping inheritance tax, including “socially democratic” Sweden, the political momentum is clearly building for reform. Simply raising the starting threshold to £1 million would be an obvious first step to take some of the heat out of the issue.
The Inheritance Tax Anomaly
Inheritance tax was originally designed to only impact the wealthiest estates. But decades of rising house prices have created a situation where ordinary families are getting caught in the tax net. Thresholds have failed to keep pace with property inflation.
When inheritance tax was first introduced in 1986, the threshold was £150,000 per person. This was subsequently raised to £250,000 in 2004-05, and later increased again to £325,000 by Chancellor Alistair Darling in 2009-10. And there it has remained frozen for the past 14 years.
Back in the 1980s and 1990s, £325,000 was considered a high threshold only likely to impact the richest families. But due to rapid house price growth, particularly in London and the Southeast, this amount now fails to exclude many middle-class families whose main asset is their home.
Average UK house prices have risen from £150,000 to over £300,000 since 2009. In areas like London, prices are more than double the inheritance tax threshold. This means children being hit with enormous tax bills just to inherit a modest suburban semi from their parents.
Adding to the frustration is the fact that other tax allowances have been raised in line with inflation. The income tax personal allowance increased from £6,475 to £12,570 over the past decade. Yet inheritance tax has been left to stagnate, exposing more families to its clutches each year.
The Freezer of 2009
Chancellor Alistair Darling made the fateful decision to freeze inheritance tax thresholds indefinitely in his 2009 Budget. This followed a fierce political battle with the Conservatives, whose 2005 election manifesto pledged to raise the threshold to £1 million.
The Tories wanted to exempt all but the largest estates from inheritance tax as part of their platform to reduce the tax burden. With Labour struggling in the polls during the financial crisis, Darling moved to negate this as an issue by setting thresholds at £350,000.
When George Osborne entered Number 11 in 2010, he felt compelled to stick with Labour’s recently announced policy. This was seen as more politically palatable than gifting the very wealthy with an inheritance tax cut.
But many backbenchers believe Osborne should have reverted to the £1 million policy when the economy recovered. Raising the threshold would have honored a clear Conservative manifesto commitment that middle-class voters expect them to deliver.
Osborne did make modifications, including the “family home allowance” in 2015. This provides an extra £175,000 tax exemption if passing a home to children or grandchildren, taking the effective threshold to £500,000 for a couple.
However, properties in many parts of the UK now exceed even this amount. Without further reform, more and more grieving families will get harsh tax bills landing on their doormat. The middle-classes are bearing the pain, while the super-wealthy have the means to avoid it completely.
Political Lightning in 2010
Anthony Browne sees this as an opportunity to recreate the political magic of 2010. He recounts how inheritance tax scored a surprise goal for the Tories last time they were in opposition.
With Labour holding a solid lead in 2008-09, the economy collapsing, and Brown poised to call a snap election, things looked grim for the Conservatives. But promising to lift the inheritance tax threshold to £1 million helped turned the narrative.
It rallied their core support and tapped into a general anti-tax feeling among middle-class voters struggling through the recession. The opinion polls started shifting in their favor. A panicked Brown famously bottled the early election, and Cameron romped home the following year.
While economic issues were undoubtedly pivotal in 2010, Browne believes the inheritance tax policy shouldn’t be understated. It gave wavering Tory supporters a reason to stick with them and highlighted Labour’s high-tax agenda. The rest is history.
Now with the Conservatives floundering again, he says a similarly bold inheritance tax move could once more seize the political initiative. It would show Tory values in action by reducing taxes on hardworking families.
Abolition Gathers Support
Alongside lifting thresholds, a growing chorus of Conservative voices are calling for the complete abolition of inheritance tax. They argue it has become an administrative burden raising little revenue, while creating perverse financial behaviors.
About 5% of estates currently get hit with inheritance tax each year, raising around £7.1 billion for Treasury coffers. But collecting this sum requires an army of lawyers, accountants and tax inspectors, not to mention hours of stressful paperwork for grieving families.
And most of the super-wealthy manage to sidestep the tax anyway through opaque trust funds and offshore investments. It ends up disproportionately hitting middle-class families with a lifetime of work invested in their homes. Many see this as deeply unfair.
This has led prominent MPs like Craig Mackinlay to join newspaper campaigns advocating the end of inheritance tax. As a chartered tax adviser and South Thanet MP, Mackinlay is well-placed to understand the distorting effects of the tax.
He argues so-called socially democratic countries like Sweden have already taken the bold move to scrap inheritance and gift taxes. The UK should now follow suit, eliminating the myriad of distortions and avoidance schemes that have sprung up around this unpopular levy.
With cross-party support building for dramatic reform, raising the basic threshold to £1 million seems a sensible compromise. It would ease the burden on middle-class families in the shorter-term, while working towards the longer-term goal of full abolition.
Election Battleground
Browne believes older, middle-class homeowners could prove a key election demographic in marginal constituencies. These voters have traditionally leaned Conservative, but are increasingly disenchanted.
Many feel left behind economically and see the Tories as now representing only the under 40s and super-rich. A bumper inheritance tax cut could get them back onside and mitigate the damage in traditional southern heartlands.
Affluent retirees worried about leaving money to their children are likely to welcome the change. It taps into a deeply held desire to provide security for one’s family and not be harshly penalized by the taxman.
Of course, this comes at a cost. Foregoing billions in inheritance tax would leave a hole in Rishi Sunak’s already stretched finances. But economies often grow faster when taxes are cut smartly, not raised wantonly. Sunak knows this trade-off well from his time as Chancellor.
Sometimes in politics, principles have to come before penny-pinching budgeting. Sunak could decide this is an issue worth fighting for on behalf of hard-pressed families, rather than dying in the trenches of fiscal orthodoxy.
If raising the threshold to £1 million can reframe the political debate and revive Conservative fortunes, that’s likely a trade-off some would gladly make. Not everything in politics can be calculated on a spreadsheet.