Tories Renew Pledge To Raise IHT Threshold To £1m

David Cameron has resurrected his pledge to raise the inheritance tax threshold to £1 million if the Conservatives win Election 2015.

The promise was a key part of his manifesto for the last election, but was horse-traded with the Lib-Dems as one of the negotiable policies if the coalition was going to work.

Now the coalition is consigned to history, the plan is back with some tweaks.

What the Tories want for inheritance tax (IHT) is for more people to pass on to their personal wealth to their families at their death.

The problem is house prices are rising so high in some parts of the country that the cost of a modest semi in London exceeds the IHT threshold, pushing the estates of more of Cameron’s beloved ‘hard working people’ into the IHT tax bracket.

Home price danger

According to the Land Registry, an average home in London costs £463,872.

The current IHT tax threshold is £325,000 for an individual – and the value of any estate worth over that limit is tax at 40%.

Couples can juggle their individual thresholds to pass the £325,000 IHT limit over to the surviving spouse or civil partner, who can then double up the IHT payment trigger to £650,000.

But a single person without the benefit of doubling up limits already pays at least £55,548 IHT on their estate if they own an average price home in the capital.

The Tories want to introduce a new IHT tax banding for main homes that gives parents an extra £175,000 each free of tax for bequeathing their home to their children.

Effectively, this new banding will raise the IHT threshold for married couples and civil partners to £1 million.

This is not a tax giveaway from the Tories, the proposal is funded by more tinkering with pensions.

Downside for high earners

The downside for those earning £150,000 a year or more is they will have their pension contributions capped. The annual allowance for these top earners will drop from £40,000 a year to 10,000.

The thinking behind this is pension relief paid on these contributions will fund the increase in the IHT threshold.

The contributions will be on a mobbing scale – those earning more than £150,000 will lose 50p of annual allowance on every £1 they earn over the threshold, until the contribution reaches £10,000 for anyone earning £210,000 or more.

The full details of the scheme still need fleshing out – for instance what about direct benefit contributions that are set as a percentage of earnings that might breach the £10,000 a year limit?

These retirement savers may be trapped into paying a tax charge on excessive contributions through no fault of their own.

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