George strikes gold with his tax reform

Much is said and written about inheritance tax. In recent years, it has come to be seen as the ultimate charge on the middle class - as property prices have risen, more and more people have been caught by the charge. It's also unfair: they've already paid tax on their incomes - to effectively hit them again by requiring their relatives to stump up when they've gone is simply punitive.

In truth, it is a tax that can be bypassed. It's also one that is very hard for the authorities to chase. A friend of mine inherited a property together with paintings. Before the valuer came round, the pictures went into the boot of the car.

Another, legal, device is to transfer all your property and chattels to your loved ones seven years before you die. Still another is to transfer them into a trust fund. In fact, within the financial advice industry, inheritance tax is regarded as a "voluntary" tax, so easily is it circumvented.

But not everyone can afford to hire a nifty accountant, particularly as the threshold of £300,000 is now within reach of lots of ordinary people, thanks to the rampant property market.

Increasingly, as a result of the boom, those swept up by the tax are not those who can easily pay - or would dream of doing so - for professional expertise. No worry; Osborne has taken them out of the net by pushing the limit from £300,000 to £1 million.

In order to pay for the £3.1 billion the Revenue will lose he's gone after that other bête noir of Middle Britain: the rich foreigner who pays little towards this country's upkeep. Like inheritance tax, the non-domiciles have long been a source of grievance. Gordon Brown came into power as Chancellor promising he would do something about them. He never did.

Instead he was lobbied hard by the "non-doms", particularly the Greek shipowners who made a point of telling him how many people they employ here and the ways they contribute to the economy (they don't pay tax on their overseas earnings but they are taxed on what they earn in the UK).

Faced with the prospect of them decamping abroad and Britain, which has derived much success from being seen to be open, appearing closed, he backed off. (The fact that several of those likely to be affected were substantial Labour donors may also have weighed heavily.)

Now, though, Osborne has pulled off a smart piece of trickery. He's cut inheritance tax and by charging the 150,000 to 200,000 non-domiciles an annual fee of £25,000 for enjoying their privileged status, has balanced the books.

It's clever and compared with Gordon Brown's performance last week, which was long on gesture and short on substance, it will make a difference.

Even allowing for doubts raised about some of his numbers, Osborne looks vital and brimming with ideas; Brown by contrast appears cautious and cumbersome.

We've known for a long time that inheritance tax needs reforming and we've also become irritated by the non-doms in our midst. At a stroke, Osborne has gone some way towards alleviating our mood. Not for nothing was he cheered to the creaking rafters of the Winter Gardens.

In the longer term, of course, it might not make much difference to Tory fortunes. But for now, he's entitled to bask in his moment. After all the empty promises, the Tories have at last come up with a couple of policies. Critically, they look like a tax-cutting, pro-British party again.

Osborne's game, though, is a dangerous one. The figure of £25,000 might be sufficient to persuade some foreigners to set up shop elsewhere. It may not but it could - in a highly competitive environment for international business, Britain will be seen as imposing a tariff to live here.

There's no denying, too, the sheer arbitrariness of it all. On inheritance tax, he's picked £1 million as a nice, rounded figure. He's then made a back of an envelope calculation to arrive at another number - £25,000 - as the amount others must pay to meet the deficit he's creating. Try as I might yesterday I couldn't find any expert who could explain £25,000 as opposed to £10,000 or £30,000 or £50,000. The only reason proffered was that £25,000 enables him to square off the non-domiciles against inheritance tax.

Still, he's having a go - which is more than can be said for Brown. It's a shame, though, that he didn't move further. If you attempt to open an account with one of the private banks that have popped up across the capital and in the well-heeled areas outside, one of the first questions they will ask is, how rich are you? They won't raise the subject so indecorously, naturally; rather they will make polite murmurings about the level of your disposable assets. By that they mean, everything apart from your home.

Increasingly, that is how real wealth is measured. The house, upon which you may have a large mortgage, is factored out of the equation. Everyone has to have somewhere to live. That some choose to spend more to live in a grander abode is up to them.

That's the argument for scrapping inheritance tax completely. There's an alternative case, not as extreme, that says only the primary residence should be taken out and the duty should still apply to the other items people own. Either one is a more radical shift than what Osborne is suggesting.

They're going too far, which is why he's taken the step he has. He wants to be seen to be reducing taxes but he's also got to be perceived as responsible. He's up against Mr Prudence himself so he had better make sure he can pay for it.

He's achieved something that Labour hasn't - which is to respond realistically to 21st-century property values and to move against a group of wealthy individuals, who in the public eye, get off virtually scot-free. For that, he deserves immense credit.

It's a pity he didn't go all the way where inheritance tax is concerned. But beggars can't be choosers - and certainly not where the tax system and the battle for the vital centre-ground of British politics is concerned.