The Budget 2005 & Inheritance Tax: Has the Chancellor Done Enough?

"The Government's economic objective is to build a strong economy and a fair society, where there is opportunity and security for all."

So reads the opening statement of the Labour Government's 2005 Budget. But the word 'fair' is wide off the mark when considering the incidence of inheritance tax on an increasing number of homeowners over the past few years.

The Inheritance Tax Problem

Over the past few years inheritance tax ceased to be the 'rich person's tax' or the 'voluntary' tax which it used to be. The cause of the problem has been the ever increasing scale of house prices resulting in property values which far exceed the Nil Rate Band exemption for inheritance tax.

Research conducted by stockbrokers Brewin Dolphin, there are an estimated 2.4 million homes across the UK that are now valued above the £263,000 inheritance tax threshold, before taking any other assets into account. And one in five people anticipating an inheritance have no idea that anything over and above the threshold will be subject to 40% of tax.

In summary, the number of homes sold which were above the inheritance tax threshold rose from 3% in 1994 to 14% in 2004 and the Government has pocketed a staggering £3.3bn in inheritance tax since 1997!

The 2005 Budget

The inheritance tax issue was a main concern for the Chancellor Gordon Brown after various professional bodies have stressed the need for the threshold to be increased.

Having heard the arguments the Chancellor did just that.

The current Nil Rate Band threshold is £263,000 and the Chancellor has announced that this is to be increased to £275,000 for the forthcoming tax year 2005/2006 and then further increased to £285,000 and £300,000 the following two years.

As a result of these increases the Chancellor has argued that 94% of estates would not pay inheritance tax. So has the Chancellor done enough?

Adequate Increases?

Are the increases to the inheritance tax threshold good enough? Should they have been increased further? It is certainly true that previous inheritance tax increases have not been so steep; usually the increases are made in line with current inflation rates. However, this Budget has seen an increase which is way above inflation.

On the other hand, the contrary argument is that the high rise in house prices necessitated such an increase, and even this may not be enough. The Halifax Building Society calculated that had the inheritance tax threshold increased in line with house price inflation over the last 10 years, then the current threshold would be sitting at £390,000 - significantly less than the figure announced by Gordon Brown.

Conclusion: Budget Blues

So was this a 'bad' budget from the inheritance tax point of view? Not entirely.

Any increase in the Nil Rate Band is to be welcomed as it sets free some of those caught in the inheritance tax net. As Simon Massey (partner with chartered accountancy firm Menzies) told BBC News, "The increase to the Inheritance Tax threshold is a long way above inflation and is very welcome...It is good to see something being done."

So whilst the increase may not exactly be in line with the current house price situation, it will certainly be a relief to many, and any increase is better than no increase at all.

JsByrne
LLB (Hons) PGDip.LPc.
www.Draft-Your-Will.com

Miss Janine Byrne holds a Bachelor of Law degree with Honours & a post-graduate diploma in Legal Practice. Also gained qualification in Wills Writing & is the owner of http://www.Draft-Your-Will.com and DYW Wills & Estate Planning Newsletter