Why people deserve an inheritance tax break

‘We’ve got it - inheritance tax.’ Were those the words uttered by a crack team of Conservative policy monkeys, after finally coming up with something to draw the battle lines over?

It’s incredible how long it took them to latch on to the ill-feeling that’s been building up over what many consider a deeply unfair tax.

It's even more incredible that the Chancellor Alistair Darling thinks shuffling some figures to make it look like he has raised the inheritance tax allowance when it just stops people having to become tenants in common solves any problems or will fool anyone.

The problem is any debate on the issue inevitably manages to get stuck straight back in the old political divisions - Tory vs Labour, Haves vs Have-nots, North vs South and so on.

But strangely when discussions take place there often appears to be a reversal of which side you would typically expect to have the notion that soaring house prices benefit people.

It’s the anti-raising inheritance tax lobby that seems to believe sky-high house prices are benefiting property owners.

The suggestion is owners of family homes that have become worth far more than the inheritance tax threshold should count themselves lucky, and not mind being heavily taxed if they try and pass it on.

‘But we have paid for our homes out of taxed income, so this is double taxation’, say the pro-inheritance tax reform posse.
‘Yes, but you didn’t earn that huge increase, you just sat back and watched the value of your home soar and now want to perpetuate injustice by handing that wealth to your offspring’, counters the eat the rich crew.

And this is where the false notion of high house prices benefiting people comes in.

The owners of an average family home in South East England bought in the early 1980s for £100,000 and now worth £800,000, didn’t directly work for that rise in value, but they are in many ways entitled to it.
Living in an area where house prices are absurdly inflated is not all fun and games:

• Your house may be worth lots but so is any other house in your home area, so there’s no benefit unless you up sticks and leave friends and family far behind.
• Your children and their friends find it almost impossible to purchase a property in their own home town.
• Your home area loses its diversity, as moving there becomes possible only for very high-earners, and pubs, shops and amenities shut as developers move in on every available spot.
• Your children will face an even bigger mountain of debt, if having managed to climb on to the property ladder they have children of their own and need to buy a family home.

This is not meant to be a 'woe of the wealthy' sob story - but these are legitimate concerns that need discussing rather than being brushed under the class war carpet.
It’s true that the Conservative proposals do play straight to the stereotypical Tory South, but then the current government has ignored those voters’ concerns over house prices for a decade.

In many South East areas a small family house now costs at least £300,000. According to Halifax’s historic house price calculator that would have cost £100,000 in 1997.

If a buyer had purchased that home in 1997 they would have needed to find £10,000 for a 10% deposit, and at an average interest rate of 7% over 25 years would pay £101,000 in interest to their mortgage lender.
A buyer purchasing it today would need to find £30,000 for a 10% deposit, owe a hell of a lot more, and at an average interest rate of 7% over 25 years would pay £302,500 in interest to their mortgage lender.

Clearly there is a problem here. But despite making controlling inflation a top economic target over the past decade, the Government has completely failed to tackle rampant price rises relating to the basic necessity of a roof over your head.

Meanwhile, it has sat back and seen its income from inheritance tax post healthy gains, as a tax originally designed for the very rich drags in more and more ordinary families. (And Stamp Duty revenues have been pretty healthy too.)

The real winners of sky-high house prices are mortgage lenders and the taxman. And those hoping to score political points on this should remember the Conservatives kicked off the whole problem a long time before the current government made it worse.

So yes, perhaps in the ‘day at the coalface’ sense the owners of homes being hit by inheritance tax didn’t ‘earn it’.

But they have paid their dues and earned more right to that money than a Government which has presided over the shambles the UK housing market is in today, or any future governments that don’t come up with any meaningful plans for sorting the mess out.

- Simon Lambert, This is Money

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Comments

[A Atkins]

There does seem to be a genuine gain on IHT for widows and widowers. My mother is 72, a widow, and has an estate worth £500K, £320K of which is tied up in her house. The family was facing a hefty IHT bill when she dies. Raising her limit to £600K and then £700K in 2010 does appear to be a real improvement, as it's unlikely her assets will ever exceed an inflation-proofed £700K, especially with the risk of having to pay nursing home fees at some point.

[Matthew Blackwell]

Does anyone understand the new inheritance tax? To me it sounds like they are leting married couples have a limit off £300,000 each manking it £600,000. But I thought you inherit when someone dies. If your married it's unlikly your both going to die at the same time.
I havent got a clue!

[westsomerset]

So now we have a coalition government in parliament. Tory and Lib Dem announce their policies and Labour implement it.However, they never seem to get it right. Tax planning is still important and advice essential.

[Richard Shuttleworth]

Why don't they scrap IHT altogether. This would simplify the tax system, get rid of the need for complicated wills that need expensive tax lawyers, and presumably allow a reduction in the staff at the tax offices benefiting the public purse - another saving. As everyone knows the rich avoid it anyway.
Legal stealing by the taxman in excessive taxation leads to tax avoidance at best and tax evasion at worst.

[Ernest Pullen]

I felt quite elated when the IHT threshold was to be doubled to £600,000. Yet later, having noticed that it was to be shared betwen spouses, I realised that our children and grandchildren would be no better off upon our eventual demise. This is because we have already ensured that each of us in turn will utilise our own 'allocation' of £300,000. Nothing has changed!

I am extremely disappointed.

[tacos]

The people who get an expensive mortgage now will be left with a very large debt when the house bubble bursts. Creating money out of nothing is always bad for everyone.
Taxes will help slow down the rise of prices as even those who come from an expensive home cannot afford it any more.

[Colin]

Tax on savings that were your previously taxed pay is more important and eroding than inheritance tax.

[Lorna Davis]

The money earned to save for buying a home is taxed as income tax. The interest earned on it is taxed again when held as savings as you attempt to gather enough to put down as a deposit. The value of the house is then used as a measure of how much tax to pay locally. To then tax you again on that same money when you die is hideous.
Yes the increase in value (if there is one) is not 'earned', however this is a risk, and beyond the control of the homeowner. If this is deemed to be fair game then there must also be a rebate whenever the value goes down.