Lately I’ve been highlighting how a string of left-wing think tanks are urging Labour to slap new taxes on ordinary people who have built up a bit of wealth. The Resolution Foundation is particularly active on this front.
Families could lose a fortune if Rachel Reeves axes the main residence inheritance tax band (Image: Getty)
Boss Torsten Bell is a Labour MP who the party leadership likes enough to parachute into a safe seat in the general election. His think tank therefore needs to be taken seriously.
On Saturday, I reported that Bell was demanding a new exit tax to punish anybody who’s had enough and wants to take their wealth out of the UK.
Today, the Resolution Foundation has come up with another way of punishing those who stay and all I can say is this – what took them so long?
Inheritance tax receipts hit a record high of £7.5billion last year, but that’s not enough for the Resolution Foundation.
It’s found a way of adding £2billion to that overnight. And I reckon this one is extremely likely to happen.
The Resolution Foundation says there is a “good case” for scrapping the £175,000 main residence nil-rate inheritance tax (IHT) band.
This is on top of the £325,000 basic nil-rate IHT band that every adult gets. It applies when people pass on their family home to direct descendants such as children and grandchildren.
The residence nil-rate band was introduced in April 2017 by former Conservative Party chancellor George Osborne.
Combined, the two allowances allow every adult to pass on up to £500,000 worth of assets to loved ones, entirely free of IHT.
Marriage couples and civil partners who plan carefully can therefore pass on £1million in total.
It’s a thoroughly Tory policy and on that score alone has always looked vulnerable to a punitive Labour strike.
Also, it adds an extra layer of complexity to an already muddled tax, giving Reeves another reason to axe it in her Halloween Budget on October 20.
The Resolution Foundation has labelled the residence nil-rate band “a complex and distortionary relief” and reckons it has to go.
Some of the tax raids Reeves is considering – such as cutting tax relief on pension contributions – would be complicated.
Others could backfire unpleasantly. For example, targeting non-doms could cost the UK £1billion rather than raising £3billion as Reeves hopes.
By contrast, axing the residence nil-rate band could be done at the stroke of a pen.
It’s all too easy for Reeves.
It would be hard to avoid, too. She could bring enforce the change with immediate effect. Overnight, it would reduce IHT tax bands by a staggering the £350,000 per family.
In a further twist, Reeves is already on record for hating it. When the Tories first mooted easing inheritance tax rules, she dismissed their plans as “a tax break for a wealthy elite”.
It’s almost as if Reeves and the Resolution Foundation are in on it. Testing the water, to gauge the response.
Politically, it would be cause Labour a lot less grief than Reeves’ inexplicable decision to snatch the Winter Fuel Payment from 10million pensioners.
That will hit single pensioners living on as little as £11,343 a year. Reeves can no longer pretend they’re wealthy, but will find it easier to demonise middle income Britons with assets of more £325,000.
Labour activists would be delirious. It would set up clear red water between them and the Tories.
Inheritance tax is charged at a punitive 40%. Someone who lost their full £175,000 residence nil-rate band would hand an extra £70,000 to the Treasury.
A couple’s estate that lost two bands worth £350,000 combined could pay up to £140,000 more IHT.
It’s an easy grab for Reeves. But yet more bad news for those who hoped to pass on their lifetime’s wealth to children and grandchildren, rather than the Treasury.
