View the article online at http://citywire.co.uk/money/article/a660708
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.
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.’
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