The claim
“A lot of people did not know until Thursday that the Conservative party’s main beneficiary in their manifesto is 3,000 millionaires.”
Gordon Brown, interview with the Observer, 2 May 2010
The background
Raising the inheritance threshold to £1m is one of the Conservatives’ flagship policies – and one which their opponents attack tirelessly.
Under the current system, when someone dies their estate (house, savings, investments etc minus any debts) is liable for inheritance tax if the value is more than £325,000.
That £325,000 is transferable between couples, even if they die in different years, so in practice a husband and wife would actually have a combined threshold of £650,000.
The Tories want to increase this to £1m, or £2m if transferred between couples.
Brown made several variations of the same claim during the final televised debate, and repeated it again in an interview with the Observer this morning. At a time when money is tight, he said on Thursday, the Tories’ inheritance tax cut would benefit 3,000 of the richest people in the country to the tune of £200k.
“Why does [Cameron] support this inheritance tax cut for only 3,000 families, worth £200,000 each?” Brown challenged during the debate.
But the Conservatives instead said their plans would help more than four million people who are currently at risk of falling into the inheritance tax net.
Who is right?
The analysis
There are two things at play here. On the one hand, not least because of the recent house price boom, there are millions of people who might seem to have houses worth enough to be liable for inheritance tax.
If the inheritance tax threshold was raised, all the estates that currently pay the tax would benefit – either because they’d be taken out of the tax bracket altogether, or because the amount they’d have to pay would be reduced.
But even under the current system, barely tens of thousands of people a year end up paying the death tax.
Last year, 15,000 estates (about 3 per cent of the 580,000 deaths in the year) were liable for the levy.
The best estimate we have for the impact of raising the threshold, as per the Tories’ policy, is from Treasury figures given to parliament both last October and last month.
According to this, 11,000 estates would benefit in the current financial year. Of these, 3,000 would be worth up to half a million pounds; 5,000 would be worth between half and one million pounds, and the remaining 3,000 would be worth over £1mn.
The Treasury estimates this would mean £600m less tax being paid by the estates worth less than a million quid, and £700m less being paid by the 3,000 worth over a million. There’s the 3,000 richest estates Brown mentions. Divide £700m by 3,000 and you get around £233,333 per estate.
So in saying that 3,000 of the richest people or families would get a tax cut of around £200,000, Brown is broadly right – based on the impact of the policy next year.
But inheritance tax is not a tax cut for “only” the richest 3,000 families – as we’ve just demonstrated, 8,000 less wealthy types would also benefit.
To be strictly accurate Mr Brown should also talk about estates rather than millionaires, people or families – something Labour acknowledged and put down to the heat of the debate.
So how can there be such a big discrepancy between the tens of thousands of estates that currently pay inheritance tax, and the millions of people the Conservatives say are worth enough to fall into the inheritance tax net?
There are two possible explanations, says Stuart Adam, senior research economist at the Institute for Fiscal Studies. It could be because people reduce their wealth as they get older – perhaps selling their house or using their savings to fund long-term care, put their grandchildren through university, or go on Caribbean cruises. This is a pattern you’d expect to continue into the future.
Or it could be that all this increased wealth is a new phenomenon for younger people – people dying now tend never to have had so much cash to play with in the first place.
It’s very difficult to know which of these is the more likely scenario – not least because of the recent historical house price boom skewing all the figures.
This doesn’t make Brown particularly slippery in quoting the figures he does. “If you increase the threshold to £1m now, it’s reasonable to think of it in terms of the effect on people who are dying now,” says Adam.
“The wealthy people in their forties or fifties aren’t all going to die tomorrow – the question for them is more, what will the threshold be in 30 years time?”
And this isn’t clear – the Tories have said only that they will raise the threshold to £1m during the parliament.
The Conservatives pointed us to a letter Philip Hammond sent to the Guardian last December, in which he said Treasury had confirmed that millions of people faced inheritance tax and that theirs was a “cautious estimate”. You can read the full thing here.
Finally, it’s worth noting that all this analysis is based on the estates that currently pay the tax. Mike Warburton, senior tax partner at Grant Thornton (which called for the abolition of inheritance tax before the Tories pledged to cut it) said inheritance tax unfairly hits those in the middle. The extremely well-off tend to be able to afford to hand down much of their wealth to their family long before they would be liable to pay inheritance tax, he said.
The verdict
Brown’s use of language last Thursday wasn’t perfect, and at one point he overstepped the mark by saying only 3,000 of the richest would benefit from the Tories’ planned tax cut. His references to 3,000 families or millionaires would also be more accurate if he stuck to “estates”.
As he said repeatedly, the 3,000 estates worth over £1m which are currently hit by inheritance tax each year would get a tax cut of around £200,000 under the Tories’ plans. This stacks up based on Treasury data for the current financial year.
But, although in monetary terms his assertion in the Observer this morning that the richest would be the main beneficiaries is correct, in fact all of the estates that pay inheritance tax – around 15,000 last year – would benefit to some extent.
As Brown’s broad point was right, we award him a fact rating.
Footnote: Eagle-eyed readers may have spotted that we said that all the estates that currently pay inheritance tax would benefit the Tories’ plans; but quoted two different figures: the 15,000 last year who benefited, and the potential 11,000 which the parliamentary question said based on deaths in the current financial year. The 11,000, from which the 3,000 is also drawn, seems to be based on a slightly an older Treasury projection.
This seems to reflect an increase in asset values in the past year, so more estates ended up being worth above the threshold. So if 11,000 is now more like 15,000, it would seem likely that the number of estates worth more than £1m within that has also increased to slightly more than 3,000. But we don’t have a more up-to-date breakdown to suggest Brown uses instead.
