Key facts
- Kemi Badenoch's proposed inheritance tax reforms aim to exempt entire family homes from the tax.
- The policy is estimated to cost £6 billion annually.
- Less than 5% of estates are liable for inheritance tax.
- Under current rules, a married couple can pass on up to £1 million tax-free.
- The proposed regime would eliminate about half of the forecast £9 billion inheritance tax revenue for this year.
- Critics argue the plan could disincentivize downsizing and negatively impact economic growth.
UK Business Secretary Kemi Badenoch has proposed significant reforms to inheritance tax (IHT), a move that, while potentially politically advantageous, is drawing criticism for its economic rationale. The plan aims to allow couples to pass on their entire family home and an additional £1 million in other assets tax-free.
While the policy is seen as a classic Conservative gambit to appeal to voters, particularly in affluent areas, economists argue it makes little economic sense. Data from HMRC indicates that less than 5% of estates are currently liable for IHT. Under existing rules, a married couple can already transfer up to £1 million without incurring the tax. Badenoch's proposed regime would significantly increase this threshold, potentially wiping out about half of the projected £9 billion IHT revenue for the current year and rising to £15 billion by 2030-31.
Critics, including Arun Advani from the University of Warwick's Centre for the Analysis of Taxation, argue that the policy could create perverse incentives. It might encourage older homeowners to remain in valuable properties rather than downsizing, fearing that the proceeds from selling would be taxed. This could exacerbate the shortage of family-sized homes in areas where demand is high, making it harder for young working families and graduates to move for job opportunities, thereby hindering economic growth.
Although the Tories suggest abolishing stamp duty could help facilitate downsizing, the significant benefit of avoiding a 40% inheritance tax on valuable properties is expected to outweigh the stamp duty relief for many. This could lead to fewer family homes becoming available on the market, negatively impacting younger generations seeking to enter the housing market.