Tories may hike inheritance limit

MICHAEL Howard is to commit the Tories to a radical tax-cutting strategy. One of the first pledges could be a dramatic increase in the inheritance tax threshold to £1m.

That would exempt some two million families from the tax at a stroke. In a major policy shift that will delight the party faithful, the Tories are to make lower taxation an article of faith.

They are targeting inheritance tax at the outset because of the deep resentment it is generating across Middle Britain.

Soaring house prices have pushed more and more people into its clutches, confronting them with the depressing prospect of leaving their children with a considerable tax bill.

Inheritance tax is currently levied at 40% on all assets above £263,000, a figure that is only some £100,000 more than the average house price.

A survey last month showed that an astonishing 2.4m estates are now liable to the tax - a total that has been increasing by two families every minute.

Raising the threshold to £1m would reduce the number to around 425,000. Almost half of those have become millionaires only in the last three years because of the increase in house prices.

When Labour came to power in 1997 only one town in Britain - Gerrard's Cross in Buckinghamshire - boasted average house prices higher than the tax threshold. Today there are 86 towns in that position.

As a result, the amount raised by inheritance tax has leapt from £1.6bn a year to £2.8bn.

Tory insiders say no options for change are being ruled out. The tax could be radically refined, paid at a reduced rate - or even abolished. But the favoured option is to push the threshold up to £1m. Gordon Brown has raised it by just 22% since 1997, while house prices have raced ahead by 130%.

The new Tory strategy will be unveiled by Shadow Chancellor Oliver Letwin at the party conference in Bournemouth next month.

While there will be no specific proposals - they will come closer to the General Election expected next year - there will be a cast-iron commitment to lower taxes.

'This will show that we are wedded to a tax- cutting strategy,' said one well-placed source. 'We will make the economic and philosphical case for cutting taxes. It will be a robust statement that we are a tax-cutting party.'

The strategy is certain to be attacked by Labour and the LibDems as a desperate last throw of the dice by a party that has failed to make progress in the polls after almost a year under Howard's leadership. But the move will delight the Tory rank and file who have been crying out for a distinctive policy platform to put to the voters.

It follows a heated behind-the-scenes debate among party strategists and marks a victory for the Thatcherites who believe a low-tax strategy is crucial to reviving party fortunes.

Critics of the plan say it will throw the Tories on the defensive in the crucial electoral battleground of the public services. Labour will claim that tax cuts can be paid for only by cuts in hospitals, schools or the police.

But Letwin believes that the current Tory review of Government spending, being conducted by businessman David James, will identify enough savings away from the front line to leave room for tax cuts.

The detailed tax pledges will be unveiled after the James review is completed this autumn and after the Chancellor delivers his pre-Budget Report in November.

The Tories intend to go into the General Election with a series of fully-costed tax cuts in their manifesto.

Party strategists say the cost of raising the inheritance tax threshold to £1m would be about £1bn. Howard has been told this would be easily affordable.

The James review is on course to identify savings of about £35bn for a Tory Chancellor to spend on other priorities - or hand back to the taxpayer.

Senior Tories are divided over how to allocate the money and the debate on the detail will continue into the autumn.

Howard is also under pressure to reverse Brown's £5bn raid on pensions, but that would prove expensive.