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UK house price boom set to lift inheritance tax revenues



By Vanessa Houlder


London housing market fears

London housing market fears

The boom in house prices is soon expected to propel inheritance tax revenues to their highest share of the economy since the early 1970s, pushing the controversial tax to the forefront of the political agenda.

Official forecasts suggest the tax will soon yield nearly 0.3 per cent of national income, a higher proportion than was achieved by Labour in the 1970s under far-reaching reforms aimed at “redistributing wealth as a means to greater justice and equality in our society”.

The last time yields were set to rise so high, in 2007, a Conservative proposal to raise the threshold to £1m proved so popular that Labour called off a snap election and doubled the threshold for many married couples.

But although rising property prices are drawing more estates into the scope of the tax, currently levied at 40 per cent on inherited wealth above £325,000, it remains riddled with loopholes. It now raises a smaller share of national income than in the first 70 years of the 20th century.

Calls for higher taxes on wealth have been sparked by growing concerns about inequality and the sustainability of public sector debt in the aftermath of the financial crisis. Thomas Piketty, the French economist, has called for new wealth taxes to tackle inequality. The IMF last year said there was a revival of interest in a “one-off tax on private wealth” to tackle public sector debt – an idea also floated by Nick Clegg, deputy prime minister, two years ago.

Conservative opposition to the tax – encapsulated by John Major’s 1992 ambition to see “wealth cascading down the generations” – is expected to lead to a revival of the 2007 promise in the run-up to the next election. Such a move would effectively abolish the tax for all “except a very small number of very rich families who do not plan their affairs in a tax-efficient manner”, according to the Institute for Fiscal Studies, the independent think-tank.

Unless there is an increase in the threshold, which has been frozen since 2009, revenues are expected to rise by an average of nearly 11 per cent a year over the next four years, according to the Office for Budget Responsibility. Strong house price growth is expected to double the number of estates large enough to pay the tax to nearly one in 10, pushing up receipts by 70 per cent to £5.8bn.

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This follows more than 40 years in which the tax has rarely raised more than 0.2 per of GDP, according to an analysis of OBR forecasts and statistics published by Revenue & Customs.

Despite a tripling of personal wealth between 1990 and 2005, the tax yield has been kept down by the costs associated with greater longevity, rises in the threshold and more generous reliefs for business and agricultural property. Earlier this year, the National Audit Office found that tax reliefs, including exemptions for widows and widowers, cost seven times the value of the amount collected. Tax planning involving trusts also diminishes the yield, prompting recent proposals to limit their use that experts say will hit “middle England” rather than the wealthy.

The 2011 Mirrlees report on the design of the tax system published by the IFS called for some exemptions to be reined back. It warned against a move to an annual tax on wealth, saying such taxes were costly and inefficient and had largely been abolished by other industrialised countries. But one aspect of a wealth tax – an annual tax targeted at high value residential property – should be considered, it said. Both Labour and the Liberal Democrats have drawn up plans for a “mansion tax” on expensive property.

The most sweeping proposal put forward by the Mirrlees review was a switch from taxing estates to taxing beneficiaries, with no exemption for lifetime gifts. The need for extensive record-keeping would create practical as well as political challenges.

But it backed radical measures to increase the legitimacy of what is currently a “halfhearted” tax that fails to tax the wealthiest and makes the “middle classes bear a disproportionate burden”.

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