The Inheritance Tax battleground

Shadow Chancellor George Osborne threw down the gauntlet with his proposals. How will Mr Darling rise to the challenge Since 1997 98 the yield on inheritance tax IHT has increased by some 135 £2.3bn on £1.7bn collected in 1997 98 and is projected to collect £4bn in 2007 08 thanks to Gordon Brown not raising rates in line with property prices.

IHT may be ripe for change the Conservatives said as much by proposing to push the nil-rate threshold up to £1 million and exempting the family home. However it was on key tax that the arch-tinkerer Mr Brown never really got to grips with although the last few years have seen some avoidance rules being introduced such as the pre-owned assets regime.

Mr Darling could score with the grey vote by introducing a sibling exemption on main residences along the lines of the spousal exemption. The Chancellor could make vote-winning headlines by addressing problems like the Burden sisters case at the EU Court in 2006 where two cohabiting sisters faced the prospect of having to sell their home to pay the IHT on the first death of either of them.

"Darling will not want to preside over a Treasury that is seen to be throwing pensioners out of their homes when forced to pay IHT" commented Francesca Largerberg of Grant Thornton.

The Nil Rate Band exemption has been set up to 2010 although Darling could make a mark by offering a further small increase and perhaps could introduce progressive taxation bands as seen with income tax on an individuals assets say 10 or 20 on the bulk of assets of modest estates and 40 on assets above £500000. For example there could be 0 tax on the first £300000 20 on following £200000 and a top rate of 40 rate for anything over £500000.

For individuals with estates in the £300000-£500000 bracket such a move would halve their IHT bill. The issue is that people in this wealth bracket are unlikely to have a large amount of liquid assets with which to pay the IHT bill and by halving the potential liability the likelihood is increased that there will be liquid assets available to pay the liability.

05 October 2007 Moneyextra.com

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