David Cameron's Inheritance Tax Cut Would Benefit The Rich, Says Research

David Cameron's pledge to cut inheritance tax to help those who were not "in any way mega-rich" would also save the richest families hundreds of thousands of pounds, research suggests.

The Prime Minister told a gathering of pensioners and older workers on Tuesday that inheritance tax, which is levied at a rate of 40% on the value of an estate above the £325,000 threshold, suggested that it should be paid only by "the very wealthy".

Cameron said he wanted to "shoehorn" into George Osborne's final Budget before the next election a policy to increase the £325,000 inheritance tax threshold, or £650,000 for married couples, with reports that he could seek to raise it as high as £1 million.

However, analysis shows that most households are not actually affected by inheritance tax, while Cameron's potential move to raise the threshold to £1 million would scrap it for everyone except the "very few" rich families who had forgotten to use loopholes to cushion the blow.

The respected Institute for Fiscal Studies estimated back in April that raising the threshold to £1 million would see the richest families "paying considerably less" tax, with a couple "whose joint estate was worth more than £2 million at death" saving around £540,000 in tax.

How common are those couples with an estate worth over £2 million? The IFS estimated, using official figures, that barely 0.5% of estates (1,443) passed on in death during the financial year 2007-2008 were of such a high value.

In its Mirrlees Review of the tax system from 2010, the IFS noted that the "large majority of estates" passed down "were small—below £200,000 in value—and therefore not within the IHT net".

Not only are many households not affected by inheritance tax, but official figures give a very good reason why the rich would be most worried about it - they pass on most of the wealth.

According to the Office for National Statistics, the vast majority (76%) of inherited wealth over 2008-2010 was comprised of wealth and assets passed on by the richest 20%.

Cameron suggested that those liable to pay inheritance tax just want to pass on a home to their children "rather than leave it to the taxman". But official figures, as noted by tax expert Richard Murphy, indicate that most inheritances include money or savings rather than property.

The "super-rich" families who would still be liable to pay inheritance tax would not need to fear a big bill, as they can use loopholes to soften the blow.

The Institute for Public Policy and Research notes that "a relatively large proportion of estates are able to avoid inheritance tax by making use of various loopholes", concluding: "A tax designed to be levied on the wealthy is not fair or efficient if it can be routinely avoided by the very wealthy."

This is not the first time Cameron has trumpeted a tax cut as a way to help "hard-working" households that, analysis shows, actually is of great help to the rich.

Telling delegates at the Tory party conference in September that he would "build a Britain that everyone is proud to call home", he promised to raise the income tax allowance from £10,500 to £12,500, and increase the threshold at which the 40p tax threshold kicks in from £41,900 to £50.000.

However, the IFS showed in its Green Budget publication this year that just 15% of the gains from increasing the personal allowance would benefit the poorest half of Britons, concluding: "There are better ways to help the low paid via the tax and benefit system."