How Osborne plans to abolish inheritance tax

David Cameron and George Osborne would like to raise the inheritance tax (IHT) threshold to £1m. They might also harbour dreams of abolishing it altogether. But they can’t. It just isn’t politically possible.

Their solution is to slash the IHT bills of middle Britain via the back door. Previously announced changes to the pension rules mean that anyone with a drawdown pension can leave it 100% tax-free to their heirs if they die before 75, and IHT-free – but subject to income tax on withdrawal – after that.

This is remarkably generous and, as we have written before, effectively means that well-off families can create and pass down multigenerational pension ‘trusts’ free of tax. Which is nice.

Yesterday’s statement extended this to holders of annuities. Die before 75 and you can now pass on a joint or fixed-term annuity tax-free to your heirs. But that wasn’t the end of it.

A hint of a new policy appeared in changes to Isa regulations. Until now, the tax advantages of your Isa wrapper have died with you – so while you could pass the contents of the Isa to your spouse IHT-free, they would then have to pay income tax and CGT on those contents later.

But now the 150,000-odd married Isa savers who die each year will be able to pass on their Isa wrapper to their spouse. This is quite a tax break.

Let’s say that a prudent saver has accumulated £1m in an Isa (perfectly possible). That could create around £40,000 in income a year – getting it tax free means a saving of £16,000 a year to a higher-rate tax payer. Which is also nice.

It may also be the beginning of a discussion about whether Isas should now start to get the same levels of inheritability as pensions. Old Mutual’s Adrian Walker reckons that the “Government should consider permitting true inter-generational sharing of Isa savings.” If pensions can be passed down the generations free of IHT, why not Isas?

My guess is that Osborne and Cameron entirely agree. Yet another reason to keep those Isas topped up.