How the PM dodged Inheritance Tax!

How the PM dodged Inheritance Tax was a headline in the newspapers last week. No wonder the 5% who have sufficient wealth to be subject to inheritance tax are confused.

Firstly I am not at all sure that David’s father’s estate saved much tax despite the press coverage. In 2006 David’s father did a house swop with his eldest son Alexander and gave £1million to each of his daughters to buy a property in Kensington.  The paper went on to say ‘None of these gifts are believed to have incurred IHT’. Huh?

For a gift to be free of IHT, the donor must survive seven years. Ian Cameron died in 2010, which is only 3-4 years after the gift. Assuming my facts are correct the estate would have paid 32% IHT on these gifts. If he had died a year earlier – he would not have saved a penny in tax and could well have incurred capital gains tax which he could have avoided if he had left his estate to his wife on death. The IHT rate only starts coming down if the deceased survives more than three years.

As matters have turned out the Cameron family would have been better off if Ian had left everything to his wife Mary or in trust for Mary and she had made gifts to her children following her husband’s death. Given that she is still alive today six years following her husband’s death, the gifts would have attracted only 8% tax rather than 32%.

The newspaper blagged that Ian Cameron must have ‘known a thing or two about tax planning’ – obviously not!

The second error in the newspaper heading was that the PM ‘dodged inheritance tax’. The PM did nothing other than to receive a gift from his father on death and from his mother during her lifetime. This does not amount to ‘dodging’.

The newspapers went on to print more drivel. Inheritance tax the newspapers said raises ‘only’ £3.7 billion, or 0.25% of GDP ‘owing to the rich finding IHT relatively easy to avoid’. A survey conducted by Octopus revealed that 90% of people do not know what the inheritance tax threshold is and only one in three home owners have thought about tax planning to avoid this much disliked tax. On the contrary to what the newspapers have printed, I am surprised at how much tax is raised.

Polly Toynbee in The Guardian came out with the most risible statement ‘The time has come ’she writes ‘to abolish the tax’.  I am certainly in favour of reducing the rate to a level where the few who want to avoid giving the bulk of their estate to the Government cannot be bothered to avoid it. At 40% we have the fifth highest inheritance tax rate in the world. A family like the Cameron’s would have paid more money to the Government in tax than any one family member would have inherited.

Toynbee goes on to suggest that the Government should ‘introduce a new system in which all income is taxed in the same way, regardless of its source’ eh?

Inheritance tax is a tax on capital. A tax on the accumulation of hard earned income on which income tax has already been paid. What therefore is the link between abolishing inheritance tax and a new system of income tax?

And what does she mean by ‘taxed in the same way, regardless of source’? Income is divided and taxed according to its source; Schedule A land, B woodland, D business activity and E employment. We have a vast amount of legislation – the second largest in the world to prevent abuse of exemptions and reliefs. However, Toynbee in one dramatic sweep suggests we put a red line through years of intense work on income tax for the sake of abolishing a tax which affects only 5% of the population.

From my experience Inheritance Tax, which was first introduced in 1984 in place of Estate Duty, is a well thought out and carefully drafted tax as proved by the fact that it has not been tinkered with that much over the decades since. However what is needed is more education for our journalists which write this rubbish and to their editors who print it.

If you would like to arrange to meet with Caroline or any one of our team at GFOS for estate planning, dispute resolution, matrimonial (including family), family governance or investment strategy call Svetlana on 020 3740 7423 or e mail