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James Hay: Proposed inheritance tax reforms

2nd October 2007 Print
Liz Henderson of James Hay’s Technical Unit comments on the proposed inheritance tax reforms announced by the Conservative Party.

Says Henderson: “In a speech at the Conservative Party Conference, Shadow Chancellor George Osborne unveiled the party’s proposals for tax reform. Unsurprisingly, the measure that has attracted the biggest headline is, of course, Inheritance Tax, illustrating yet again that for a tax that raises relatively small revenues for the Government, it is the one that generates the most debate. In the tax year 2007/08, it is anticipated that nearly £4 billion will be collected in Inheritance Tax. Although this seems a fairly substantial sum, it in fact only represents less than 1 per cent of total tax receipts in the UK. Yet the reason for the ill feeling against IHT in recent times is that it is perceived to be a tax on the family home, with more and more families being caught in the net simply because of rising house prices.

“In a bid to address this issue, it has been announced today that a Conservative Government would raise the IHT threshold (currently £300,000) to £1 million and as a result of this measure almost 9 million people would escape an IHT liability.

“While there is no doubt that, coupled with the abolition of stamp duty, these changes would be welcome news for homeowners, they would cost the Government approximately £3.5 billion according to the Conservatives. So how will these lost revenues be funded? Well the answer looks set to cause more controversy than Inheritance Tax itself.

“The question of non-domicile status and the associated tax advantages have been under review by the Labour Government for the last five years. The UK tax system has long been criticized for the fact that many long-term UK residents of foreign nationality have continued to avoid paying UK tax on their overseas assets on the basis that changing the tax regime would be detrimental to inward investment. However rather than reviewing residency and domicile as a whole, the Conservatives intend to impose a flat rate Offshore Domicile Levy on anyone registered as domiciled overseas for tax purposes. According to Mr Osborne “A cautious estimate is that the levy would be paid by 150,000 UK residents of foreign origin who are tax domiciled offshore. If it was set at £25,000 a cautious estimate is that it would raise £3.5 billion. Setting the levy at around £25,000 strikes the right balance between ensuring everyone contributes their fair share towards our public services and maintaining the competitiveness of the UK as a location for high net worth individuals.”

“Obviously we would need to see the detail on this but imposing the levy is unlikely to be as clear-cut as it sounds. Many non-domiciled individuals will simply have a few bank accounts and perhaps some offshore investments that do not result in significant tax savings, and as a result will be reluctant to register as non-domicile after all. Others will have considerable wealth overseas and a flat rate levy of £25,000 may be a drop in the ocean compared with their overall tax savings. One would imagine that this levy would result in many of the rich and famous reaching for their chequebooks and heaving a sigh of relief that stronger measures were not imposed.”