Howard to target inheritance tax

INHERITANCE tax could be scrapped under radical proposals published by the Conservatives today. In an attempt to put tax cuts at the heart of the next General Election campaign, the Tories unveiled plans which could see the unpopular levy swept away altogether.

Around 2.4m middle class families would benefit from the Tory proposals.

Inheritance tax, currently levied at 40p in the £1 for any assets left above a threshold of £263,000, has become a source of growing resentment.

Soaring house prices mean hundreds of thousands of hard-working families have been dragged into its clutches over the past seven years. Within five years, experts estimate that one in eight will be liable to pay inheritance tax after their deaths, compared to one in 40 five years ago.

The tax is particularly unpopular because individuals are ' double-taxed' - paying inheritance tax on earnings, savings and investments on which tax has already been paid.

{1}Tory leader Michael Howard will respond today by publishing a 12-page document spelling out his proposals to tackle the problems caused by the duty. The paper will contain five options for reform - and will declare that the simplest of all is to abolish inheritance tax.

This would lift a burden from more than 2.4m families across the country and allow parents to leave their children a tax-free inheritance for the first time in decades. It would also consign 900 pages of tax laws to the dustbin. However, it would be an expensive reform and would cost an incoming Tory administration £2.9bn.

Another option would be to raise the threshold at which inheritance tax kicks in from £263,000 to £ 1m - a step which would cost £2.5bn. This would ensure the tax was paid only by the very rich.

A third option is to cut the inheritance tax rate. Cutting the rate to 10%, or 10p in the pound, would cost £2.4bn. A fourth possibility would involve exempting the principal residence or main home - a step which would cost £2bn.

However, such a reform could encourage taxpayers to invest more in housing and end up fuelling sharp increases in house prices.

A final option would involve linking the threshold at which individuals start paying inheritance tax to the increase in house prices. This would cost only £200m and would prevent many being hit by the tax simply because the value of their house has gone up.

Howard said yesterday that he hoped to present voters with firm policies on taxes before the election, which is expected to be held in May. The various proposals will be considered by experts, businesses and taxpayers.

{2}Shadow Chancellor Oliver Letwin argued that reform of the tax was unavoidable. 'Inheritance tax is increasingly a tax on the homes of ordinary families. Around six million people are now living in homes which could be affected,' he said.

'It is unfair to impose a high marginal rate of tax upon hard-working families who happen to live in parts of the country where property is expensive. I believe the tax system should support rather than penalise families building their financial security and independence.'

He said that when Labour came to power, inheritance tax was raising £1.6bn a year. The figure has soared to £2.8bn.

The key problem has been the buoyant housing market. Since 1997, the average house price has risen by 138% - but the threshold for inheritance tax has grown by just 32%.

When Labour came to power, there was only one town in Britain - Gerrards Cross in Buckinghamshire - where average house prices were above the inheritance tax threshold. This year, there are a total of 86 towns where the average price is above the threshold.