Conservative Treasury Minister Kemi Badenoch has proposed a significant overhaul of the inheritance tax (IHT) system, aiming to allow homeowners to pass on their entire family home without incurring tax liabilities, alongside an additional £1 million in other assets. While the move is intended to address the unpopular nature of inheritance tax, economists and tax experts warn the policy could have adverse economic consequences and primarily benefit the wealthiest.
Current HM Revenue & Customs data reveal that only about 5% of estates were liable for inheritance tax in the 2023/24 tax year, representing the wealthiest portion of the population. Under existing rules, married couples can transfer up to £1 million in property tax-free to their heirs by combining allowances. Badenoch’s proposal would remove limits on the value of the family home passed on, rendering even very high-value properties exempt from IHT.
The government estimates the policy would cost taxpayers around £6 billion, effectively reducing inheritance tax revenue by roughly half. Total IHT receipts are projected to rise from about £9 billion in 2024 to £15 billion by 2030-31. Critics argue that this loss of revenue may reduce funds available for public investment, such as infrastructure projects that could stimulate economic growth.
Economists caution that the plan may introduce unintended incentives that could hinder the housing market and labour mobility. By eliminating the tax on high-value homes, homeowners may be reluctant to downsize, preferring to hold onto valuable properties to preserve the tax advantage. This behavior could constrain the availability of family-sized homes in high-demand areas, limiting opportunities for younger families and workers to enter the housing market.
Arun Advani, an expert at the Centre for the Analysis of Taxation at the University of Warwick, points out that the proposal’s impact would be most pronounced in expensive housing markets where job opportunities are concentrated. He notes that reduced turnover of larger homes could make it more difficult for school leavers and recent graduates to relocate for employment, potentially dampening economic growth. Additionally, some homeowners might be incentivized to move into larger properties to shield more assets from inheritance tax.
Conservative officials suggest that abolishing stamp duty—which taxes property transactions—alongside the IHT changes would encourage more housing market activity and promote downsizing. However, analysts argue that the relief from inheritance tax on high-value properties is likely to outweigh any benefits from a stamp duty abolition, limiting the effectiveness of that measure.
Although Badenoch’s proposal may hold political appeal amid widespread public dissatisfaction with inheritance tax, its economic merits are being questioned. Observers suggest the policy primarily redistributes wealth to affluent households and may hamper broader economic objectives related to housing availability and mobility.