Inheritance tax - stealing the Tories' big idea?

The Chancellor poured scorn on the Conservative proposal to increase the Inheritance Tax (IHT) limit to £1 million but then proceeded to increase the IHT limit anyway. He was not as generous as the Conservative policy suggestion would have been but given that Gordon Brown had already pre-announced smaller increases in the IHT threshold through to 2010, Alistair Darling's move marked a significant policy shift.

Essentially the move benefits couples - specifically married or in civil partnership - but leaves singletons out in the cold. With effect from 9 October 2007 you may make a claim to transfer any unused IHT nil-rate band on a person's death to the estate of their surviving spouse or civil partner.

Thus, if on the first death the entire estate was left to the surviving spouse, none of the original nil-rate band would have been used and the surviving spouse's nil-rate band is effectively doubled.

In fact, the Chancellor's plans for IHT do not initially appear to be actually providing anything that tax efficient Wills would have provided anyway. The change will save couples the need to jump through hoops when planning their Wills. However, prudent people would have already arranged their affairs to achieve this anyway, so the Chancellor's announcement won't save them a penny.

The Council of Mortgage Lenders welcomed the move. CML director general Michael Coogan said, "With the estates of married couples now exempt up to £600,000, rising to £700,000 by 2010, the effect is broadly the same as if the Chancellor had fully indexed the inheritance tax threshold for the effect of house price movements since Labour came to power, which would have resulted in an exemption threshold of £608,600."

Of course, what the move does do is penalise those who are not in relationships and this section of the populations should not be overlooked. Notably the Chancellor has failed to address problems like the Burden sisters' case which went all the way to the EU Court in 2006 (where two cohabiting sisters in their 80s face the prospect of having to sell their home to pay the IHT on the first death of either of them).

At the same time, Mr Darling tightened the Government's grip on inheriting tax-relieved pensions savings. He announced plans to introduce legislation in Budget 2008 to ensure that tax-relieved pension savings diverted into inheritance using scheme pensions and lifetime annuities are subject to unauthorised payment tax charges and, where appropriate, IHT.

This move re-enforces the Government's intention not to allow pension funds to pass on to the next generation beyond age 75, despite the amount of industry lobbying in this area. Therefore, using pensions as your main means of retirement planning, whilst a tax efficient method, should be solely seen as providing for your own / spouse's needs in retirement and not as a way of passing an asset to the next generation.

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