Inheritance tax reform promised in UK election battle

Britain’s Conservative Party has vowed to reform inheritance taxes in a bid to counter the Labour Party’s promise to abolish the ‘non-domicile’ regime as the UK election campaign heats up.

These two promises, along with proposed mansion taxes, changes to the top rate of income tax and greater efforts to combat avoidance, kept taxation policy at the forefront of the campaign which is still widely expected to result in a hung parliament after the vote on May 7.

Chancellor George Osborne revealed over the weekend that a future Conservative government plans to remove family homes worth up to £1m from inheritance tax by raising the threshold on the death duty. The plan will be paid for by imposing higher taxes on pension savings of people earning more than £150,000 a year.

“We will take family homes out of inheritance tax,” Osbourne told the BBC’s Andrew Marr show on Sunday. “We will effectively increase the inheritance tax threshold to £1 million, so that only millionaires pay inheritance tax as originally designed for that tax,” he said.

At present, inheritance tax (IHT) is payable at 40% on the value of an estate in excess of the tax-free allowance of £325,000 per person. Married couples and civil partners can pass the allowance on to each other.

The IHT policy promise came under immediate attack from the Institute for Fiscal Studies which warned its removal on homes worth up to £1m would disproportionately benefit richer people.

However, others have cautiously welcomed the move.

“This is an encouraging move that acknowledges that rising house prices have left a lot of families unable to pass the family home to their children without paying inheritance tax, which is especially pernicious given that the home is bought with taxed income,” said Sophie Dworetzsky, a partner at the international law firm Withers.

Adrian Walker, retirement planning manager at Old Mutual Wealth said: “Pension tax relief is being used like an election piggy bank and there is a danger that the emerging good will towards pensions is stunted.”

The Tories have also said they planned to claw back £5bn from tax avoiders, while the centrepiece of their policy is to eliminate the budget deficit by 2019 without raising taxes.

Labour manifesto launched

Labour leader Ed Miliband, in launching his party’s election manifesto on Monday, reaffirmed a commitment to get rid of the rules which provide for the remittance basis of taxation in the UK, the so called ‘non-dom’ regime.

“We will abolish ‘non-dom’ status so that all those who make the UK their home pay tax in the same way as the rest of us,” Miliband promised.

Labour have also said they would introduce mansion tax on homes worth over £2m and reintroduce the 50p top tax rate. Tax avoiders would face bigger fines as part of Labour’s plan to raise an extra £7.5bn a year, if the party wins the general election.

The party plans to carry out an immediate review into the culture and practices of HMRC if re-elected and said it will introduce tougher penalties for those abusing the tax system, as well as end unfair tax breaks used by hedge funds and others.

Labour also plans to seek international agreement to make country-by-country reporting information publicly available, and said it will act at home if agreement is not reached. British Overseas Territories and Crown Dependencies will be required to produce publicly available registries of the real owners of companies based there.

Among the smaller parties contesting the election, the Green Party has promised to make the highest earners pay a 60p top rate of tax. A “wealth tax” of 2 per cent would be introduced on those with assets of more than £3 million.

Britain’s top earners currently face a 45p rate on income over £150,000.

The UK Independence Party (UKIP) has said those on minimum wage would be spared tax altogether and inheritance tax would be scrapped.