Osborne’s inheritance tax U-turn is “robbing Peter to pay Paul”, say firms
Chancellor George Osborne’s decision to avoid increasing the inheritance tax threshold to £1m has come under severe criticism from tax experts.
The government announced earlier this week that it would freeze the inheritance tax threshold at £325,000 until 2019 in order to fund an increased cap on social care costs to £75,000.
“Whilst there are many other things that need to be done to prepare for an ageing population, these reforms do herald a historic change in the way that care and support is funded in this country,” Health Secretary Jeremy Hunt said.
Obviously few would condemn the decision to boost social care for the elderly, but the inheritance tax change has caused a particular gnashing of teeth after Osborne’s keynote announcement at the 2007 Tory conference. Here he announced exactly that he would increase the threshold at which people start paying inheritance tax to £1m.
This was widely credited with scaring off Gordon Brown from calling an election against a Conservative Party at its lowest ebb.
Now that Osborne has changed his mind in government, experts have rushed to tell LondonlovesBusiness.com of their scorn for the move.
Katharine Arthur, tax partner at leading UK accounting firm MHA MacIntyre Hudson said:
“This move really is robbing Peter to pay Paul. The plan to cap care spending is commendable. The further freeze to the nil rate band at £325k is another change to announced Government policy and a vast difference from the Conservative manifesto pledge of a nil rate band of £1m.
The cap on care costs seeks to prevent people from having to sell their homes. But, with a nil rate band of only £325k, many houses will have to be sold on death to pay the IHT in any case”.
Roger Holman, who is a senior tax manager at Cripps Harries Hall, tells LondonlovesBusiness.com that the government deserves praise for keeping things stable, even if Osborne’s pledge has now been scuppered.
“Although cynics may say that this is bad for business, the one positive that we can draw is that the government is providing certainty for long term planning. It does highlight the need to consider IHT planning at an early stage, particularly if your assets are likely to increase in value. The IHT threshold has now been frozen since April 2009 and during this period Greater London house prices have increased by almost 24% (according to the Nationwide House Price Index). Simple options such as including a ‘nil rate band trust’ in your will can save significant sums in IHT over the next few years.
“On the negative side, this does put a final nail in the coffin of the ‘promise’ of an increase in the IHT threshold to £1m. It now seems unlikely that we will see this (or any great increase in the threshold) in the next parliament, unless the economy takes a startling turn for the better. When considering tax planning, we can only rely on what is law. Promises of politicians cannot be taken as gospel.”
Andrew Bolt, MD of insurance brokers Insurance Tailors, pours scorn on the fact that the social care cost boost wouldn’t be enough for Britain’s ageing population.
“We have a much bigger, longer term issue with the escalating costs associated with a population that is living longer; I don’t therefore see how freezing inheritance tax thresholds for 3 years will make any material difference.”
Chas Roy-Chowdhury, head of tax at the ACCA, warns that all the move would do is “create fiscal drag that would affect the middle classes”.
“The overall impact is that with property prices going up, you’ll drag more people into this tax where they’ve bought these properties out of taxed income. With inheritance tax, they’re hit twice!,” he added.
Gekko MD Daniel Todaro is also exasperated by the move:
“There’s little that this coalition government can do that will surprise me anymore, such is the extent of the blundering, the indecision and the outright mess that the economy is currently in. However, to not only completely renege on the flagship inheritance tax pledges, but actually bring more citizens within the threshold is stunning. So much for ‘ordinary’ people not being ‘punished for working hard and saving hard.” Instead, Cameron and Osborne have conspired to make a mockery of their pledges and hypocrites of themselves by furthering one of the ‘stealth taxes’ that they have railed against for so long,” he says.
Jonathan Russell, partner at ReesRussell, scoffs at the benefits of the announcement:
“It appears that, as usual, political pledges are not even worth the paper they are written on. We are told that the abandonment of the target for inheritance tax of £1m is to fund the £75,000 cap on care home fees, but this itself is actually cost neutral and is equally a misleading headline as most will also be liable for a residential cost levy of at least a similar amount bringing the average cost to £150,000.
“Under current rules, the state already has an obligation - frequently argued against - to cover the costs of ‘care’ and in some instances residential cost where linked directly to the care element. It is actually the cost of residential care as a result of infirmity that most worry about and this it appears is having little done about it. Beware politicians apparently bearing gifts as it normally means you will be paying for it.”
Finally, David Whiscombe, director of tax services at Berg Kaprow Lewis, is similarly angry about Osborne’s “cynical” u-turn:
“Implementation of the pre-election pledge would have represented a meaningful attempt at exempting from inheritance tax people who should never have been within its scope; its cynical abandonment is to be deprecated. But what else did you expect?”
Given the force of the reaction, Chancellor Osborne can only hope that he has nothing worse to announce in his upcoming Budget. If he does, the fierce reaction could be beyond imagining…
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