Sentimental trick hides a stealth inheritance-tax rise

All UK political parties are keen on "hard-working families". No speech of any kind by any party leader can pass without mention of them. But what of the hard working but childless?It seems, says Ross Clark, in The Sunday Times, that no one is quite as keen on them. For proof, look no further than Chancellor George Osborne's inheritance tax (IHT) reforms.

The £175,000 per person "family home allowance", which when added to the £325,000 nil-rate band for IHT effectively brings a couple's IHT-free allowance up to £1m, "will only apply to direct descendants".

So as a couple you can leave £350,000 worth of "main home" to your children, grandchildren, and great grandchildren and even to your stepchildren. But you can't leave it toyour brothers, sisters, nieces, nephewsor godchildren.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

On the face of it this makes some sense. After all, the official rationale for the move is sentimental: children shouldn't have to sell the houses they were brought up in when their parents die. But look at how the system will work, and you will fast see that the sentimentality is just a trick to distract us from what is an effective rise in the IHT allowance for those with children.

You don't have to have brought your children up in the house you use this £350,000 allowance on: the only condition is that it must, at some point, have been used as your main residence. So if you brought your children up in a tiny suburban semi, but bought a £3m Chelsea flat to retire to (perhaps after receiving your own inheritance?), the "family home" for IHT purposes becomes the flat, not the semi.

It is also worth noting, of course, that the vast majority of those who die with assets of £1m or more have a house worth £350,000-plus anyway. So all the new rule does is take this out of the nil-rate band, leaving it to cover the other assets.

My point? That this isn't about family homes. It is just a way to cover a rise in the IHT allowance to £1m without getting too much criticism from those who feel that £650,000 is quite enough it is almost impossible for politicians to argue against anything to do with the "family home".

Given this, those who find that their lack of children disqualifies them from the rise in the IHT allowance have every right to complain. In fact, as the (I assume) unintended victims of a political sleight of hand, they should complain more loudly. And as there is no rational reason for Osborne not to listen, their nieces, nephews and godchildren should assume that he will soon slip in a change in their favour so they should be very, very nice to their rich relatives.