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IHT freeze will not help pay for long-term care reform, say accountants

Baker Tilly accountants believe the government's plan to raise £100 million from an IHT freeze is optimistic and it may be forced to increase other taxes to pay for reforms.

IHT freeze will not help pay for long-term care reform, say accountants

The government’s plan to use an inheritance tax (IHT) freeze to help pay for long-term care reforms could come up short, forcing a tax increase in other areas, according to accountants Baker Tilly.

In December’s Autumn Statement chancellor George Osborne declared the IHT nil rate band would rise 1% from £325,000 to £329,000 for individuals but the government has decided instead to freeze the threshold for three years from 2015/16 to pay for care reforms.

The government has calculated that it can raise £100 million by freezing the threshold. The money saved would go towards the £1 billion annual cost of paying for a £75,000 cap on care fees and increasing the means-testing threshold from £23,250 to £123,000.

It will raise another £6 billion from the move to a single-tier state pension.

George Bull, senior tax partner at accountants Baker Tilly, believes the government may have overestimated how much the IHT freeze will add to the coffers.

‘The government thinks that not increasing the [IHT] nil rate band in line with inflation at 3% will generate £100 million,’ he said.

‘There are many different factors affecting IHT income to the exchequer. While the cost of living may be increasing fast, growth in property values – on which a large proportion of IHT is paid – remain sluggish in many parts of the country.’

Since the IHT rate was set at £325,000 in 2009 a total of 40% more estates will be caught in the IHT net this year but the tax take has not increasing significantly, which Bull said suggested ‘the impact has been in the paperwork created for more estates having to file IHT returns’.

‘The IHT take dropped in the year following the 2009 freeze, and it was not until 2011/12 that it exceeded the pre-freeze levels, and then only by £65 million. So, raising £100 million from a freeze in two years time seems optimistic,’ said Bull.

‘If there is a need for funding for such a worthwhile area [as long-term care], then tax either needs to be raised or existing taxes need to be distributed differently. A freeze in the IHT threshold is unlikely to make a significant addition, if any, to the tax take and, conversely, could lead to more red tape for many more families at a time when they would prefer not to have a prolonged process to deal with.’

4 comments so far. Why not have your say?

Mr Robert

Feb 22, 2013 at 14:23

Perhaps the answer is no inheritance tax threshold at all and everyone pays tax on anything left in their estate at say 25%. That may also encourage people to spend which would probably help the sluggish economy if they do. If they don't the state gets it cut anyway .Taking inheritance tax it of everyone and covering the cost of care by the state for everyone would probably be a fairer system

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Ruth Colvin

Feb 22, 2013 at 16:45

If someone who goes into a care home has been living in their own, privately owned home, then they must have had enough income to run that home. When they go into a care home, that income is available to help with the cost of that home. They could also rent out their own home and that would give another tranche of income to help with care home fees. In addition, they would probably be eligible for Attendance Allowance. If these 3 tyoes of income did not fully cover their fees, then their family could arrange a suitable equity release or even make a contribution themselves. What am I missing given that so many people complain about having to sell granny's house when it seems to me that they could organise to keep it?

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Michael Stevens

Feb 22, 2013 at 17:08

IHT should be increased to £500,000

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Feb 22, 2013 at 19:58

IHT should be zero.

It's tax on assets that have already been taxed twice.

Zero IHT would attract the wealthy to these shores, increase the income tax and VAT and create employment by their spending.

It would also reduce the numbers of wealthy retiring abroad.

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