Kemi Badenoch’s recent announcement on inheritance tax reform outlines measures that would alter the current system but stop short of eliminating death duties altogether. Speaking last Wednesday, the Conservative leadership contender pledged to exempt family homes passed to children and grandchildren from inheritance tax (IHT) and to raise the threshold on other assets to £1 million for couples. She also expressed a longer-term ambition to eventually abolish the tax when public finances permit.
Despite the apparent generosity of raising the threshold, the proposal effectively maintains the status quo in many respects. The so-called £1 million exemption reflects a combined allowance of £500,000 per individual, with couples able to transfer unused portions between them. This arrangement was originally introduced in 2007 by then Labour Chancellor Alistair Darling to counter a similar policy from Conservative George Osborne. Since 2009, the individual nil-rate band has remained unchanged at £325,000, a figure that has lost value against inflation, meaning the real threshold today is effectively lower than it was over a decade ago.
Excluding family homes from IHT, similar to how principal residences are treated for capital gains tax, is likely to be welcomed by many and could reduce concerns over estate taxes. However, the policy has its drawbacks. Limiting the exemption to homes may discourage downsizing or prompt some to upsize later in life as a method of reducing heirs’ tax liabilities, potentially exacerbating challenges within the UK property market. While further tax reliefs on moving to more appropriate housing could accompany the reform, they risk complicating an already intricate tax system, running counter to Badenoch’s broader goal of simplification.
Critics also point to fairness issues inherent in the exemption targeted at estates with children. With fertility rates declining and a growing proportion of individuals dying childless, the policy could create disparities by imposing a heavier tax burden on those without offspring, regardless of their reasons.
Beyond the mechanics of the proposals lies a deeper skepticism about their long-term viability. Observers question whether any future government will consider public finances robust enough to abolish inheritance tax entirely, as Badenoch envisions. Historically, promises to repeal IHT have gone unfulfilled, with political considerations often outweighing fiscal arguments. While scrapping the tax could boost economic activity by encouraging wealth retention and attracting new investment, such a move faces considerable political resistance, particularly from opposition parties ready to criticize any perceived tax breaks for the wealthy.
If implemented, Badenoch’s reforms would narrow the scope of inheritance tax to the wealthiest estates, potentially intensifying the political challenges associated with its abolition. As a result, death duties are likely to remain a fixture of the UK tax landscape for the foreseeable future, despite recent signals of reform.