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Tory pledge to cut inheritance tax ‘disproportionate’ – IFS

The Conservative’s pledge to raise the inheritance tax threshold on family homes to £1m would “disproportionately” benefit higher income earners, the Institute for Fiscal Studies (IFS) has warned. 

David Cameron has promised that if his party is elected on 7 May, he would cut inheritance tax so that parents can pass on a family home worth up to £1m to their children without paying that tax. 

He said: “We will take the family home out of inheritance tax. That home that you have worked and saved for belongs to you and your family. 

“You should be able to pass it on to your children. And with the Conservatives, the taxman will not get his hands on it.” 

At present, inheritance tax 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. 

If the Conservatives win the General Election, from April 2017 the party would introduce a new £175,000 per person transferable allowance for main residences when they are passed to children or grandchildren.

This could be added to the existing £325,000 inheritance tax threshold, bringing the total transferable tax-free allowance from both parents in a married couple to £1m. 

But the IFS observation said the vast majority of estates (over 90%) are not liable to inheritance tax at the moment and therefore would not benefit. 

IFS added: “The Conservatives estimate that their policy would be a giveaway of about £1bn. With around 50,000 estates forecast to pay inheritance tax over the next few years this gives an average (mean) gain per inheritance taxpaying estate of around £20,000. 

“Since the children of those with very large estates are disproportionately towards the top of the income distribution the gains from this (and in fact any) inheritance tax cut will also go disproportionately to those towards the top of the income distribution.” 

It was noted that many features of the Conservative policy are similar to one analysed in a Treasury document leaked to the Guardian last month. This estimates that, based on Budget 2014 forecasts, the policy would reduce the proportion of estates liable for inheritance tax from 8% in 2015-16 to just over 6% by the end of the Parliament, rather than see it rise to just over 10% under current policy. 

Chris Leslie, Labour’s shadow chief secretary to the Treasury, said: “This is just the latest panicky promise from the Tories, but we’ve heard it all before. The Tories made a promise on inheritance tax before the last election and they broke it. 

“At a time when our NHS is in crisis and most working people are paying more under the Tories, it cannot be a priority to spend £1bn on a policy which the Treasury says would not apply to 90% of estates. The Tories would choose to give a £140,000 tax cut for a house worth £2m while they have increased VAT on families and pensioners.” 

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