Ministers are to abandon the Conservative Party’s flagship pledge to reform Britain’s “unfair” inheritance tax system in a move that will hit four million middle-class Britons.
George Osborne, the Chancellor, will announce that the level at which inheritance tax becomes payable will be frozen at £325,000 until at least 2019 to fund reform of the social care system.
The decision will mean that the owners of an average home across much of southern Britain and large areas elsewhere will be liable for inheritance tax. Critics said it was effectively a “double tax” as it was a levy on assets already raided by the taxman and accused the Treasury of “picking people’s pockets”.
Before the election, the Conservatives had pledged to increase the inheritance tax limit to £1 million with both Mr Osborne and David Cameron saying that the right to pass on untaxed assets was a “most basic human instinct”.
The party argued that the policy would benefit four million Britons as inheritance tax would again become a levy only faced by the wealthy.
It was seen as a “totemic” commitment that demonstrated that the Tories were in touch with the concerns of ordinary Britons as people prudent enough to save money for future generations were being protected.
But after forming the Coalition with the Liberal Democrats, the Tories agreed to delay inheritance tax cuts to prioritise income tax reductions.
Just eight weeks ago, the Chancellor had announced modest increases in the inheritance tax threshold before the next election, but these will now also be abandoned.
The announcement that the threshold will be frozen effectively means that Mr Cameron and Mr Osborne have abandoned their flagship policy, which cannot now be introduced for at least 13 years after it was pledged.
Ministers are expected to argue that abandoning the pledge is justified as it will help to protect people from unlimited social care bills running into hundreds of thousands of pounds.
However, the decision is expected to cause further unease among Tory MPs over the priorities of the party’s leadership following last week’s same-sex marriage vote and the delay in offering tax breaks to married couples.
Nick de Bois, the MP for Enfield North, said: “In what is otherwise a good first step in dealing with social care, I am concerned that having built our reputation on inheritance tax moves, we should not jeopardise that and I hope we can look at other ways for paying for this. Some will see this as a tax on aspiration and that is not the right thing to do.”
John Redwood, the MP for Wokingham, called for immediate tax cuts in next month’s Budget.
“I think we need tax cuts in the Budget,” he said. “We need to set competitive rates of tax on income tax and capital gains tax. They would be my priorities because we’re not competitive and we’ve got to get on with growing the economy. I don’t regard inheritance tax as a priority.”
Matthew Sinclair, chief executive of the TaxPayers’ Alliance, accused the Treasury of “picking people’s pockets”. He added: “Inheritance tax is a deeply unfair double tax which is levied on assets that will have been paid for by income the taxman has already dipped his fingers into.
“In opposition the Chancellor was critical of his predecessor’s love of stealth taxes, it seems like not much has changed in the Treasury since.”
Mr Sinclair added that “punishing taxes” were not the answer to the social care problem, and called for spending cuts instead.
In his speech to the Tory conference in 2007, Mr Osborne was credited with reviving the party’s electoral fortunes with the pledge to increase the inheritance tax threshold to £1 million.
He criticised the tax as hitting the “aspirations of ordinary people” and said that in a “Conservative Britain” people would “not be punished for working hard and saving hard”.
Mr Osborne said: “When inheritance tax was first introduced it was designed to hit the very rich … Instead, thanks to Gordon Brown, this unfair tax falls increasingly on the aspirations of ordinary people.
“These are people who have worked all their lives. People who have saved money all their lives. People who have already paid taxes once on their income.
“People whose only crime in the eyes of the taxman is that instead of spending their savings on themselves, they want to pass something on to their families. People who feel the most basic human instinct of all: they aspire to a better life for their children and their grandchildren.”
Shortly before the last general election in May 2010 the Conservative Party said the policy would benefit four million people. However, ministers will today announce that the inheritance tax threshold will be frozen to help pay for reforming the social care system in England and Wales. This is expected to benefit just 100,000 people a year by 2025.
Jeremy Hunt, the Health Secretary, will say that people will only have to pay the first £75,000 of their social care costs with the Government paying for the rest.
The decision not to increase the inheritance tax threshold in line with inflation will mean an extra 5,000 people each year will be affected.
However, the symbolic nature of ruling out inheritance tax reform means that the policy may prove costly politically to Mr Osborne.
Mr Hunt declined to comment on the specifics of today’s announcement, but said: “The point of what we’re doing is to protect people’s inheritance; the worst thing that can happen at the most vulnerable moment in your life, you lose the thing that you worked hard for, that you saved for, your own house.”
A government source said the reform was fair as changes to social care funding would stop people losing their nest eggs.
“We came into power to help those who work hard and want to get on,” the source said. “This does that as it means those who have worked and saved all their life and bought a property won’t have it taken away just because they did the right thing. That’s only fair.”
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