The Daily Telegraph - Saturday - Money
Election history can repeat if Tories promise to abolish inheritance tax
“Inheritance tax is a penalty on thrift, independence and enterprise that is largely paid by people of modest means who either cannot, or simply do not, make a careful plan to avoid it.”
So said Kenneth Clarke in his November 1996 budget. In the same speech he announced plans to abolish the tax altogether as soon as he could afford to do so. With the Labour landslide six months later he sadly lost that opportunity.
Inheritance tax (IHT) was introduced originally as Capital Transfer Tax (CTT) by Labour in 1975 in the face of fierce Tory opposition. It replaced estate duty which had been in place since 1949 and predecessor estate taxes since 1894.
Labour were determined to attack inherited wealth and levied CTT at rates progressively up to 75pc. This applied to both lifetime transfers and at death.
It operated on a cumulative basis across your lifetime so unlike estate duty, which had a seven-year cut off, there was no escape.
As a consequence many wealthy families fled Britain in advance of the change. Following her 1979 election victory, Margaret Thatcher drove through successive measures to ease the tax, first in 1981 when Geoffrey Howe limited accumulation to 10 years and halved the tax rate on lifetime gifts.
Then in 1986 Nigel Lawson took a major step forward by abolishing the tax on lifetime gifts to individuals. However, he brought back the old estate duty rule that caught lifetime transfers made within seven years of death.
Lawson also introduced the reservation of benefit rules that can apply if you give away an asset, but continue to benefit from it. The original CTT legislation remained largely unchanged although he renamed it Inheritance Tax to emphasise his reforms. It is sometimes assumed that IHT was brought in two years earlier because the main legislation applying is in the Inheritance
Tax Act 1984, but that was a consolidation act, subsequently amended in 1986.
The Tory party has always recognised the inherent unfairness of the tax, which penalises prudence and frequently represents double taxation. In July 1995, pre- dating Mr Clarke, John Major told Parliament: “When it is appropriate and we can afford to do so, I wish to abolish both capital gains tax and inheritance tax. Unlike the Labour party, I believe in trying to pass wealth down between generations.” Now, The Telegraph and more than 50 Tory MPs are saying that it is the time to do so.
On Oct 1 2007 we witnessed an event when tax policy changed political history and which the Conservatives would do well to reconsider. That afternoon at the Conservative Party autumn conference George Osborne, the then shadow chancellor, announced that the next Tory government would raise the IHT threshold to £1m and take the family home out of inheritance tax.
He declared that “in a Conservative Britain, only millionaires will pay death duties”. Gordon Brown had become prime minister four months earlier and with a 12-point lead in the opinion polls was planning a snap election.
Osborne’s announcement hit all the front pages and in a matter of days Mr Brown’s poll lead had vanished. He called off his election plans and the opportunity never returned. It was a political masterstroke. Eight days later
Alistair Darling presented his first budget and was forced to make a late change to his plans in response to Mr Osborne’s promise.
It would have been politically difficult to copy it directly, so instead he announced that on death a spouse could transfer their unused IHT nil rate band to their surviving spouse, something that we now take for granted.
By the time Mr Osborne became chancellor in 2010 the economic landscape had changed and with his Lib Dem coalition partners pressing for their policy of increased personal allowances he had no scope to raise the IHT threshold.
Nevertheless, in April 2017 the residence nil rate band came into effect, a reflection of Mr Osborne’s promise that a couple could take a £1m family home out of IHT.
So, strangely. two important IHT reliefs that we have today arose not from any economic imperative but from straight political expediency. Mr Osborne reacted to Mr Darling’s 2007 Budget by claiming that Mr Darling had stolen his own tax plans.
Nick Garland used this for a wonderful front page cartoon for The Telegraph the following day depicting Mr Brown and Mr Darling as burglars doing just that. Mr Osborne liked the cartoon so much that he had a copy framed and which I saw hanging on his office wall several days later.
Since then we have gone backwards with the IHT threshold frozen at £325,000 and more families inevitably falling into the IHT net.
In the 13 years since 2010 the pledges of Mr Major and Mr Clarke and Mr Osborne have until now been overlooked. Nevertheless, as Mr Osborne appreciated, IHT is a highly unpopular tax and proved it by demolishing Mr Brown’s election plan in 2007. With the Conservatives again behind in the polls, the party has an opportunity to announce the abolition of IHT and provide a platform for another Conservative election victory.