Badenoch's £6bn inheritance tax plan would exempt family homes

Kemi Badenoch's proposed inheritance tax policy would allow couples to pass on the entire family home, regardless of its value, plus an additional £1m in other assets, completely tax-free. The Conservative politician's plan is estimated to cost £6bn of taxpayers' money each year.

Total inheritance tax revenue is forecast to be about £9bn in the current year, rising to £15bn by 2030-31. Badenoch's proposal would therefore wipe out roughly half of the forecast inheritance tax revenue.

Historical context and comparison

This proposal revives a long-standing Conservative idea. In 2007, George Osborne pledged to 'take the family home out of inheritance tax' with a £1m threshold. The Conservative-Lib Dem coalition came to power in 2010, but Osborne's inheritance tax pledge did not come to pass due to the financial constraints that followed the global financial crisis.

Impact on housing market and economic growth

Under current rules, a married couple can already pass on a property worth up to £1m tax-free using combined allowances. Less than 5% of estates were liable for inheritance tax in 2023/24. The biggest beneficiaries of the new policy would be in areas where housing is expensive.

Arun Advani of the University of Warwick's Centre for the Analysis of Taxation states there would be an incentive for those who can afford it to upsize to a larger house to shelter assets from inheritance tax. The policy may also encourage older homeowners to stay in valuable properties to avoid tax on downsizing proceeds. For high-value homes, the savings from avoiding 40% inheritance tax would likely outweigh any benefits from a proposed stamp duty abolition.

This could reduce the supply of family-size homes on the market in areas where they are most needed by first-time and upgrading buyers. Advani notes that "‘Where housing is expensive’ mostly means ‘where lots of people want to live’, usually because there are good jobs." By reducing mobility, the policy hinders economic growth. He adds that "Reducing housing sales here will make it harder for young working families trying to upsize" and for school leavers and graduates to move for work.

Broader Conservative housing policy

The Conservatives claim they will also abolish stamp duty to support the property market and encourage downsizing. Analysts suggest this may not offset the inheritance tax effects, which create strong incentives to retain large properties.

The policy is characterised as transferring £6bn to the already-wealthy in hopes of gaining votes in the stockbroker belt. Experts conclude it cannot be credibly claimed to support economic growth.