May 9, 2010 • 11:00 pm

As talks between the Conservatives and the Liberal Democrats run into their third day, which policies will be sacrificed in any potential coalition deal?

Beyond the significant differences between the two parties on immigration or Europe, there appear to be points of friction on the issue of tax.

Over the weekend several Lib Dems raised concerns about the possibility of backing a Conservative government that held on to plans for an inheritance tax cut.

As Lib Dem Foreign Affairs spokesman Ed Davey, told the BBC’s Politics Show yesterday: “They wanted tax cuts for millionaires, we wanted tax cuts for people on low and middle incomes”.

He added: “Giving tax cuts for millionaires isn’t a priority for Liberal Democrats.”

However the Conservatives have moved to dismiss such rhetoric.

The Claim

Tory MP Grant Shapps, also on the Politics Show, strongly refuted Mr Davey’s argument.

“This thing about the Conservatives wanting to give tax cuts to millionaires is absolute tosh,” he said.

The Tories’ inheritance tax cut was one of the policies criticised most by their opponents during the election campaign.

But what are the numbers behind it, and are the Tories opponents really talking “absolute tosh”?

Analysis

The Treasury has produced figures showing what the effect would be of the Conservatives plans, were they to be implemented in the current financial year. The total loss of revenue to the Government would be £1.2 billion if introduced in 2010-11. But how much of this would go to those with wealth of over £1 million?

The document shows that the plan would indeed see 3,000 people paying a total of £600-700 million less in taxes to the Treasury.

When the Institute for Fiscal Studies looked at the proposals they stated that the cut would mean inheritance tax was only paid by “a small number of very rich families”, but that even these would pay considerably less.

For example, a couple whose joint estate was worth more than £2 million at death would attract £540,000 less tax as a result of the plan, the IFS research suggested.

So it is indisputable Conservative plans do amount to a tax cut benefitting millionaires.

However, the tax cut does not exclusively benefit millionaires. Government figures show that 11,000 people stand to benefit from the change. Given that 3,000 of these have estates worth over £1 million this still leaves  8,000 people who would hypothetically benefit were the tax introduced this year. So the Conservatives policy would actually benefit more non-millionaires than millionaires.

Conclusion

Suggestions that Conservative policy includes a tax cut for millionaires are not as Grant Shapps suggested “absolute tosh”. As Treasury estimates and independent analysis have shown it clearly would have this effect.

Had Ed Davey and others been suggesting only millionaires benefitted from the policy, Mr Shapps might have had a case.

What Mr Shapps could take issue with would be firstly that the inheritance tax policy only benefits millionaires – it doesn’t.

The second point would be that while those such as Mr Davey would contrast the Tory inheritance tax cut with Lib Dem plans to raise the income tax threshold to £10,000, there are other aspects of Tory policy to consider – such as avoiding a rise in national insurance.

The IFS estimates that Tory plans to limit in rates mean anyone earning up to £44,000 per year would pay £150 less in national insurance than they would have done under a Labour government. 

So this key aspect of Tory Tax policy can be seen to be aimed at low and middle income earners, rather than millionaires.

But if the Liberal Democrats are not talking “absolute tosh” on inheritance tax cuts, there would appear to be some ground to make up between the two parties on fiscal policy. Indeed the inheritance tax cut discussed here jars with Lib Dem proposals for a new ‘mansion tax’ to be levied on properties over £2 million in value.

Likewise the IFS pointed to such a policy gap in tax plans, suggesting Lib Dem policies were, broadly speaking, the most progressive out of the three main parties, while the Conservatives ideas were the least progressive.

It seems if the sides are to strike a deal in the coming days, there can be no room for talking tosh.

 

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