When asked by the BBC's Newsnight to propose a way of saving significant amounts of money from the government budget, Fabian research director Tim Horton argued to freeze the inheritance allowance at its current level. By scrapping various planned and future increases in the allowance, he argued that we could save anything up to £1.4 billion in the first year, (possibly rising to as much as £2 billion by year five) against various possible future plans.

“With the MP’s expenses scandal over the last couple of months, we’ve all seen the public anger over taxpayers’ money being squandered on clearing moats and buying duck houses.

“The Tory plan to raise the inheritance allowance for the richest estates in Britain would basically be a one-and-a-half-billion-pound Moat Clearance Fund. It would be Christmas time for ducks.

"Inheritance tax is paid on an individual’s estate when it is passed on at death. The inheritance tax allowance (the ‘nil-rate band threshold’) is currently £325,000, meaning this amount can be passed on tax free. Inheritance tax at 40% then kicks in for the value of any inheritance above this threshold. So a £375,000 transfer with a £325,000 allowance would be liable for £20,000 inheritance tax (40% of £50,000) – an effective tax rate of 5%.

"Changes to the rules for married couples made by the Government in 2007 ensured that a person can transfer their allowance to their spouse, effectively doubling the allowance to £650,000. And it is this double allowance that now applies to most taxable transfers, creating an effective threshold of £650,000. Only around 8% of estates on death are worth more than £325,000, and only 2% are worth more than £650,000. So inheritance tax applies only to the wealthiest estates in the UK.

"Every time the inheritance allowance is increased, this represents a reallocation of resources to the wealthiest estates. Whilst it’s easy to think of it as a tax cut, in practice, increasing the inheritance allowance can also be thought of as a ‘tax expenditure’ – a discretionary decision by government to spend revenue on creating a larger allowance. It can be thought of a bit like benefit expenditure, although in this case benefits that go to the very wealthy.

"Despite the fact that £650,000 is a huge amount of money, there are proposals on the table to increase the inheritance allowance still further. The Labour Government has been increasing it every year in increments of around £15,000 – an uprating process that all parties have appeared to support. This year the allowance is increasing by £25,000, to £350,000 (or £700,000 for couples), even though house prices are falling. The Conservative Party additionally proposes to raise the individual allowance to £1 million, thereby raising the couple allowance (effective in most cases) to £2 million.

"My proposal is to freeze the inheritance tax allowance, setting the current £650,000 as a ceiling for the foreseeable future. By scrapping the annual uprating process, we could save £150 million in the first year, potentially rising to as much as £500 million in year 5 (if the government were to continue uprating by increments of around £15,000 a year).

"By scrapping the Conservative proposal to increase the allowance to as much as £2 million, we could save around £1.2 billion in the first year, rising to potentially as much as £1.5 billion in year 5. Assuming the Conservatives were also committed to uprating the threshold in similar annual increments, the combined saving on their plans could be as much as £1.4 billion, rising to £2 billion in year five. So this proposal saves up to £500 million under Labour’s plans and up to £2 billion under Conservative plans. And this is money that would otherwise go to some of the wealthiest estates in the UK.

"Any freeze on the inheritance tax threshold should be combined with some reforms to make inheritance tax fairer.

"We should:

• Make it clear that the tax falls not on the donor but on the recipient of what is a huge unearned windfall by formally converting inheritance tax into a capital receipts tax
• Ensure no-one has to sell their home to pay the tax by allowing people to defer payment while they are living in their home
• Close loopholes that allow some of the richest estates to avoid paying the tax, by including within it transfers made by extending the period in which lifetime gifts are subject to the tax

Inheritance tax currently has a negative image in the media but there are some important arguments in defence of it."

He argued: "Inheritance tax is in reality not a tax on the deceased but on the recipient of a large unearned windfall. If we tax income earned from work, then it only seems fair to tax unearned income too. What's more the intergenerational transfer of wealth is a positive act, and this is not necessarily undermined by the tax system taking a modest cut of the proceeds. Supporting inheritance tax is therefore not incompatible with encouraging people to pass things on to their children.

• The distribution of personal wealth is currently highly unequal. The most recent figures show the wealthiest 1 per cent own 21 percent of the nation’s wealth, while the poorest 50 percent own just 7 per cent. Because the intergenerational transmission of wealth tends to reinforce inequality, inheritance tax can make a small contribution to moderating wealth inequalities.
• Inheritance tax is a small but significant source of revenue. In previous years it has brought in around £3 billion, though receipts are currently falling as a result of various factors.”

See the PDF table below for the figures on this.

Timstable.pdf

Link to Newsnight's Politics Pen.