Would £1m inheritance tax threshold give £200,000 to the richest?
The claim
“A lot of people did not know until Thursday that the Conservative party’s main beneficiary in their manifesto is 3,000 millionaires.”
Gordon Brown, interview with the Observer, 2 May 2010
The background
Raising the inheritance threshold to £1m is one of the Conservatives’ flagship policies – and one which their opponents attack tirelessly.
Under the current system, when someone dies their estate (house, savings, investments etc minus any debts) is liable for inheritance tax if the value is more than £325,000.
That £325,000 is transferable between couples, even if they die in different years, so in practice a husband and wife would actually have a combined threshold of £650,000.
The Tories want to increase this to £1m, or £2m if transferred between couples.
Brown made several variations of the same claim during the final televised debate, and repeated it again in an interview with the Observer this morning. At a time when money is tight, he said on Thursday, the Tories’ inheritance tax cut would benefit 3,000 of the richest people in the country to the tune of £200k.
“Why does [Cameron] support this inheritance tax cut for only 3,000 families, worth £200,000 each?” Brown challenged during the debate.
But the Conservatives instead said their plans would help more than four million people who are currently at risk of falling into the inheritance tax net.
Who is right?
The analysis
There are two things at play here. On the one hand, not least because of the recent house price boom, there are millions of people who might seem to have houses worth enough to be liable for inheritance tax.
If the inheritance tax threshold was raised, all the estates that currently pay the tax would benefit – either because they’d be taken out of the tax bracket altogether, or because the amount they’d have to pay would be reduced.
But even under the current system, barely tens of thousands of people a year end up paying the death tax.
Last year, 15,000 estates (about 3 per cent of the 580,000 deaths in the year) were liable for the levy.
The best estimate we have for the impact of raising the threshold, as per the Tories’ policy, is from Treasury figures given to parliament both last October and last month.
According to this, 11,000 estates would benefit in the current financial year. Of these, 3,000 would be worth up to half a million pounds; 5,000 would be worth between half and one million pounds, and the remaining 3,000 would be worth over £1mn.
The Treasury estimates this would mean £600m less tax being paid by the estates worth less than a million quid, and £700m less being paid by the 3,000 worth over a million. There’s the 3,000 richest estates Brown mentions. Divide £700m by 3,000 and you get around £233,333 per estate.
So in saying that 3,000 of the richest people or families would get a tax cut of around £200,000, Brown is broadly right – based on the impact of the policy next year.
But inheritance tax is not a tax cut for “only” the richest 3,000 families – as we’ve just demonstrated, 8,000 less wealthy types would also benefit.
To be strictly accurate Mr Brown should also talk about estates rather than millionaires, people or families – something Labour acknowledged and put down to the heat of the debate.
So how can there be such a big discrepancy between the tens of thousands of estates that currently pay inheritance tax, and the millions of people the Conservatives say are worth enough to fall into the inheritance tax net?
There are two possible explanations, says Stuart Adam, senior research economist at the Institute for Fiscal Studies. It could be because people reduce their wealth as they get older – perhaps selling their house or using their savings to fund long-term care, put their grandchildren through university, or go on Caribbean cruises. This is a pattern you’d expect to continue into the future.
Or it could be that all this increased wealth is a new phenomenon for younger people – people dying now tend never to have had so much cash to play with in the first place.
It’s very difficult to know which of these is the more likely scenario – not least because of the recent historical house price boom skewing all the figures.
This doesn’t make Brown particularly slippery in quoting the figures he does. “If you increase the threshold to £1m now, it’s reasonable to think of it in terms of the effect on people who are dying now,” says Adam.
“The wealthy people in their forties or fifties aren’t all going to die tomorrow – the question for them is more, what will the threshold be in 30 years time?”
And this isn’t clear – the Tories have said only that they will raise the threshold to £1m during the parliament.
The Conservatives pointed us to a letter Philip Hammond sent to the Guardian last December, in which he said Treasury had confirmed that millions of people faced inheritance tax and that theirs was a “cautious estimate”. You can read the full thing here.
Finally, it’s worth noting that all this analysis is based on the estates that currently pay the tax. Mike Warburton, senior tax partner at Grant Thornton (which called for the abolition of inheritance tax before the Tories pledged to cut it) said inheritance tax unfairly hits those in the middle. The extremely well-off tend to be able to afford to hand down much of their wealth to their family long before they would be liable to pay inheritance tax, he said.
The verdict
Brown’s use of language last Thursday wasn’t perfect, and at one point he overstepped the mark by saying only 3,000 of the richest would benefit from the Tories’ planned tax cut. His references to 3,000 families or millionaires would also be more accurate if he stuck to “estates”.
As he said repeatedly, the 3,000 estates worth over £1m which are currently hit by inheritance tax each year would get a tax cut of around £200,000 under the Tories’ plans. This stacks up based on Treasury data for the current financial year.
But, although in monetary terms his assertion in the Observer this morning that the richest would be the main beneficiaries is correct, in fact all of the estates that pay inheritance tax – around 15,000 last year – would benefit to some extent.
As Brown’s broad point was right, we award him a fact rating.
Footnote: Eagle-eyed readers may have spotted that we said that all the estates that currently pay inheritance tax would benefit the Tories’ plans; but quoted two different figures: the 15,000 last year who benefited, and the potential 11,000 which the parliamentary question said based on deaths in the current financial year. The 11,000, from which the 3,000 is also drawn, seems to be based on a slightly an older Treasury projection.
This seems to reflect an increase in asset values in the past year, so more estates ended up being worth above the threshold. So if 11,000 is now more like 15,000, it would seem likely that the number of estates worth more than £1m within that has also increased to slightly more than 3,000. But we don’t have a more up-to-date breakdown to suggest Brown uses instead.
There are 7 comments on this post
Cathy, The statement that you are investigating stated “the Conservative party’s main beneficiary in their manifesto is 3,000 millionaires”
The dead person does not benefit at all! It is the beneficiaries of their estates that benefit from the Conservative proposal. As most estates are distributed amongst more than a single person, and those recipients might not be millionaires, but could in fact be children, grandchildren, charities and other worthy causes – how can you confirm that the main beneficiary will be 3000 millionaires.
Don’t fall for the Labour spin.
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Just as we all thought, it’s just the same old tories claiming to be looking out for middle income families when in fact it looks after those who can more than look after themselves. The UK should be looking at having a more equitable, more progressive taxation system for all.
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All this came about with the revelation that hundreds of thousands of families had set up simple trusts to combine the personal inheritance allowances of married couples. They got twice the personal limit and whilst others paid much more inheritance tax on similar estate values.
Government consulted on ‘what to do’ to extend that wheeze to everyone, and the Tories decided to trump any new response by mounting this extraordinary offer to multi-millionaires: get a £ million off or another £ million extra for free! Cameron will gain by this.
A key point – often overlooked – is that NONE of us can take our wealth with us! Not even a Egyptian Pharaoh has ever been able to carry his possessions into another life. You can check that if you wish, Cathy.
Which is partly why the American billionaire Andrew Carnegie suggested that a rich person who left an inheritance had failed. Give it away while you’re still alive he urged!
Fortunately, both Bill Gates and Warren Buffett have heeded that advice and are giving away their billions whilst they still have time to do that. Others are following their wise example.
Quite why anyone is daft enough to wait until after their own death to dispose of more than £600,000 of their material possessions is beyond all explanation.
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But the distinction between millionaires and their families/estates is surely an important one, and ignored by Labour. The millionaires don’t benefit at all – they are dead!
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I’m sure that once again the members of the Sunday Times rich list will be delighted to be sentenced to death within a year by Gordon Brown, who seems to think that there are only 3,000 millionaires in the country: he has NEVER stated that his estimate is per year. Please remember that Darling imposed a fixed £325k allowance for the next five years in his budget with no indexation, so we can safely multiply his number by at least 5 – do you award FACT ratings for errors of that magnitude? It seems so.
The £200k tax saving per estate figure is WRONG. IHT is at 40%, so that would imply a difference in taxable value of £500k exactly.
Conservatives are talking about BENEFICIARIES. Dead people don’t benefit from anything other than a decent burial. Also, as we know the only certainties in life are death and taxes – so it is reasonable to assume that Labour intend to maintain an increased proportion of estates subject to IHT in line with their freeze in the nominal limit – despite house prices increasing at over 10% pa.a according to Nationwide.
It seems you haven’t picked up the inconsistency in the answer given by Lord Myners, who estimated the cost at £500m in 2010-11 rising to £1.2bn, £1.4bn and £1.5bn in later years – 3 times the cost, so presumably 3 times as many estates affected? Yet his table for 2010-11 shows a total of £1.3bn. Figures don’t match, and shouldn’t be trusted.
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Even the Conservatives’ own figures have only the wealthiest 7% of the population benefiting. The nil rate bands are £325,000 or £650,000 for a couple. The average house price is £170,000. There’s just nothing more to be said. It’s a tax cut for wealthy people.
If there was economic reasoning behind it, that might be different. But economic reasoning would tell you to cut productivity taxes like income tax, or extend the tax breaks on business investment. IHT is about the last thing you’d cut if you were hoping to stimulate the economy. The reasoning behind the cut is entirely moral, as with marriage tax breaks. I find people’s faith in the Tories’ grasp of economics extraordinary.
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its always the same story people dont like the fact that ordinary middle class peopple who work damn hard for what they have should get a slight incentive in ANY tax break. The people who dont like are normally lefties who expect to sit on their rear ends while the country gives them a living and they think they are entitled to THAT!!!
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