David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.
The situation for the Conservative Party on 24 September 2007 was somewhat precarious. We had been out of office for ten years. Tony Blair had beaten us heavily three times and now his successor, Gordon Brown, was riding high in the opinion polls. He was about to deliver his first Labour Party conference speech as Prime Minister, and speculation was intense that he was considering calling a general election. The Conservatives – and David Cameron in particular – had had a difficult summer while Brown had enjoyed a political honeymoon. The polling suggested that Labour would win any such election. Experience suggested that this would plunge the Conservative Party into a bout of civil war.
The Shadow Chancellor, George Osborne, was due to deliver his conference speech in a week’s time. It was possible that this might not happen if Brown called an election in the interim, but the likelihood was that Osborne would have an opportunity to disrupt plans for a snap election. He summoned his Shadow Treasury team and told us exactly how he would do it. He would announce that we would increase the threshold for inheritance tax (IHT) from £300,000 to £1 million, paid for by a new fee to be levied on non-doms.
The task was now to keep the policy under wraps (which nearly went wrong when an email discussing the plans was sent to a Liberal Democrat MP, Mike Hancock, rather than to Osborne’s chief of staff, Matt Hancock). But when Brown delayed making a decision and Osborne made the announcement on 1 October, the momentum in British politics changed. The policy was wildly popular in the Blackpool conference hall (which we had assumed), but it also struck a chord with large parts of the country. That, and an excellent speech from Cameron two days later, was enough to dissuade Brown from going to the country. Labour lost its opportunity to be re-elected and proceeded to lose the next four general elections.
I was reminded of this when reading the reports that senior figures in Government are considering adopting the policy of abolishing inheritance tax (IHT) at the next general election. Once again, the Conservatives are facing electoral defeat and, once again, the hope is that a bold policy on IHT will be a “gamechanger”.
IHT is strikingly unpopular given how few pay it (fewer than four per cent of estates) and how little (£7 billion a year) it raises. It offends many people’s sense of fairness and the natural desire to pass on one’s assets to one’s children. It is a tax that is hated by many Conservative members and the Conservative press. One can see why this might be tempting to abolish it – but it is a temptation best resisted.
Personally, I have never found IHT as offensive as some. The argument that it constitutes “double taxation” is unpersuasive. Lots of taxes are paid out of post-tax income, and if we want to abolish them all we would need much higher levels of income tax.
In any event, for most estates the bulk of the values derives from the appreciation in the value of the family home – a capital gain which has not been taxed at all. Nor is it some unspeakable intrusion on the grief of loved ones for an element of an estate to be taxed. In all likelihood, the beneficiaries in these circumstances will still be inheriting more than most people ever will. Good luck to them – but this hardly constitutes an intolerable hardship.
As for the economic case, one can see how IHT could act as a disincentive to creating wealth, but high marginal rates of tax on income, capital gains or corporate profits are much more likely to be a problem. In practice, higher inheritances for people in their late 50s or early 60s (which is typically what happens) will only encourage people to take an earlier retirement, which is the last thing that we want just at the moment.
Then there are the realities of the current state of the public finances. Last week’s announcement on public sector pay (meeting the recommendations of the pay review bodies largely from departmental underspends) highlights how precarious the public finances are. A permanent pay increase has been funded by temporary savings. The current tax and spending projections lack credibility and, even then, the Government’s fiscal rules will be met by a whisker. Add to this the problem of inflation and the need to avoid making the Bank of England’s task harder, there is no scope for a fiscal loosening. We cannot afford to reduce the tax burden for the foreseeable future.
But what about the politics? Some will point to Osborne’s 2007 move and argue that it worked then and it will work again. It is an argument that ignores the events that followed.
October 2007 was the perfect time to make an announcement on IHT. Property prices had been growing strongly and that looked set to continue. More and more estates were being dragged into the IHT net, and the public did not know where this would end. The economy was still growing strongly, and few appreciated that the public finances were in a structurally weak position – too dependent on banking profits and a buoyant housing market. In any event, Osborne had set out a fully funded plan, with additional contributions from the wealthy which meant that we could argue that this was a progressive plan.
The policy was a winner in 2007 but, by the time we got to the 2010 general election, there was only one party who wanted to talk about it and it wasn’t us. The Global Financial Crisis had wreaked havoc on living standards and the public finances. House prices had fallen and IHT was remote prospect for almost everyone. The non-dom levy had been copied by Labour, and the money spent (on making IHT allowances transferable between spouses, further reducing the salience of the issue).
Most importantly, it was obvious that tough decisions were going to need to be taken on the public services (indeed, that was at the heart of our campaign). Protecting the wealthiest estates was evidently the wrong priority – and undermined our credibility as a potential Government capable of consolidating the public finances fairly. We tried to avoid talking about it; Labour raised it at every opportunity.
So let us return to the next election. Will the economic and political circumstances resemble 2007 (a good time to cut IHT) or 2010 (a bad time)? The answer is obvious – the public finances will be under strain with tough decisions to come.
Abolishing IHT would look extraordinarily out of touch to those struggling to pay their bills or worried about the state of the public services. It would undermine any claim to fiscal responsibility. And it would smack of panic, suggesting that the height of Conservative ambitions was holding on to the most prosperous constituencies. In short, if anyone in Downing Street believes that it is a policy that will replicate the positive political impact of Osborne’s announcement of 2007, they are deluded.