The Government moved to regain the initiative in the debate over inheritance tax yesterday, by doubling the threshold beyond which families will have to start paying the tax when their relatives die.
The changes, which take effect immediately, allow married couples and those in civil partnerships to transfer their inheritance tax allowance – currently £300,000 – to their spouse when they die, meaning couples will no longer pay tax on their estate unless it is worth more than £600,000.
With the individual inheritance tax thresholds due to rise to £350,000 in 2010, this will give couples a joint allowance of £700,000 from the start of the next decade. The changes will be backdated indefinitely, ensuring that widows and widowers will also benefit. The change will cost the Treasury £1.4bn by 2010.
Alistair Darling also promised to take inflation and house price growth into consideration when reviewing the thresholds in future, ensuring that only the wealthiest families pay the tax.
Rapid house price inflation over the last decade has doubled the number of families paying the tax. Gordon Brown ignored calls to raise the threshold while he was Chancellor, relenting only in his final Budget , when he raised the threshold from £250,000 to £300,000. Ian Miles, an inheritance tax specialist at the accountants Grant Thornton, said: "If inheritance tax had kept up over the last decade with the property market, the nil rate band would now be £515,000. This is a tax that was originally designed to tax the wealthy and [after these changes] it will. The changes made today mean less of middle Britain will be affected."
Last week, George Osborne, the shadow Chancellor, called for the threshold to be raised to £1m, claiming "in a Conservative Britain, only millionaires will pay inheritance tax". Mr Osborne said he would pay for the proposals by charging an annual fee for non-domiciled residents who pay little or no tax in the UK despite holding millions of pounds in assets overseas.
The Government dismissed the proposals as unrealistic, but Mr Darling yesterday adopted an adapted version of both policies, unveiling plans to raise £500m a year with annual charge for non-domiciled residents who have lived in the UK for more than seven years.
He hit back at Mr Osborne's £1m threshold, saying: "If I was to raise the inheritance tax threshold to £1m, it would cost a further £2bn. In doing this proposal, £1bn would go to estates worth more than £950,000, the top 1 per cent only. Instead, I have decided to go ahead with raising the inheritance tax exemption to £700,000 for married couples and civil partnerships and invest the additional £2bn in health and education.
"Let us now have the debate about what is affordable and what is fair in the future of inheritance tax."
Last week's row over inheritance tax dented the Government's popularity and cost it its lead over the Conservatives in opinion polls. Mr Brown subsequently ruled out the possibility of an autumn election.
Mr Osborne described the Government's move to adopt the Tory proposals as a "desperate cynical stunt from a desperate and weak prime minister".
Accountants were quick to point out that the changes to inheritance tax were more of a simplification to the existing rules than the dramatic overhaul that the Chancellor had talked of.
Nicola Roberts, a senior manager at PricewaterhouseCoopers, the accountants, said couples can already pool their inheritance tax allowances by setting up a nil-rate discretionary trust, but few do.
"Many families never get round to this and find themselves paying unnecessarily high tax bills. These changes will simplify the current system and ensure that fewer families have to pay any inheritance tax at all."
Andrew Stead, head of wealth at Bradford & Bingley, added that while the simplification of the rules was good news for many families, the changes did not go far enough – pointing out that divorcees and non-married couples could still find themselves facing hefty inheritance tax bills.
"According to recent research, 61 per cent of Britons are failing to seek advice about how to minimise their inheritance tax liabilities," he said.
"Six out of ten Britons between the ages of 35 and 50 haven't even made a will, despite the predicament this could leave dependents in if they were to die unexpectedly."
Fru Jaggard, property developer: 'My money is for my kids'
I have three kids who are 22, 24 and 26, and have left home. I live at home with my husband, who is 58.
My house is worth around £660,000. So even with the Chancellor raising the threshold to £600,000, I'm still paying it. I was glad to hear it will be raised to £700,000 by 2010, but that's years too late.
If I was very wealthy I wouldn't object to the government taking its cut. But I'm not wealthy enough to pay this tax. I've still got a mortgage to pay off and I don't spend lavishly.
For a long time the threshold has been far too low, and I like the Tories' idea of raising it to £1m. As property prices go up, Joe Public will find that this tax affects him. That's why it's such a big part of what the Chancellor said yesterday. People don't want to see a family home having to be sold to pay the Government.