Conservatives Propose Inheritance Tax Overhaul

Conservative leader Kemi Badenoch has announced plans to overhaul inheritance tax if her party wins the next general election, proposing that "nobody will ever pay inheritance tax on their family home" and that couples will be able to leave an additional £1 million tax-free.

Tax experts suggest the Conservative party's estimated annual cost of £6 billion for the plan is reasonable. However, they also caution that the policy would predominantly benefit wealthier households and could potentially discourage older individuals from downsizing their homes. BBC Verify has examined the specifics of this proposed policy.

How the Plan Would Work

Under the current UK system, a 40% inheritance tax is levied on estates exceeding £325,000. This tax-free threshold can be transferred to a surviving spouse or civil partner, raising the combined threshold to £650,000. Additionally, an extra transferable allowance of £175,000 per person is available for a family home when it is left to direct descendants. Currently, this means most married couples can leave up to £1 million without incurring inheritance tax.

The Conservative proposal would increase the initial £325,000 threshold to £500,000 and completely exempt a family home from inheritance tax. For example, an estate that includes a £2 million house, which could currently be liable for £400,000 in inheritance tax, would face no tax under the proposed changes.

Current Inheritance Tax Landscape

Official figures indicate that in the 2024-25 tax year, approximately 30,400 deaths in the UK resulted in estates liable for inheritance tax, representing about 5% of all UK deaths. This number is projected to rise due to increasing inherited wealth and a frozen tax threshold. The Institute for Fiscal Studies (IFS) estimates that by 2032-33, around 12% of individuals will have inheritance tax due on their estate or that of their spouse or civil partner. The Conservatives, citing analysis from Oxford Economics, suggest the number of estates subject to the tax will reach 52,100 in 2029-30.

Beneficiaries of the Conservative Policy

The Conservatives estimate their reforms would reduce the number of affected estates to 22,000 by 2030. Official data shows that estates with higher valuations contribute the majority of collected inheritance tax. The IFS has projected that if inheritance tax were abolished entirely, the wealthiest 1% of estates, valued at £2.1 million or more, would receive half of the tax reduction benefit.

Financial Implications and Criticisms

The Office for Budget Responsibility (OBR) forecasts that inheritance tax will generate £9.5 billion in 2026-27 and £14.5 billion by 2030-31. The Conservatives estimate their plan would cost £6 billion annually by 2029-30. The party claims to have identified £71 billion in annual savings, including £36 billion from welfare cuts.

Professor Andy Summers, director of the Centre for the Analysis of Taxation, has criticized the plan, stating that exempting the family home regardless of its value could incentivize older people to concentrate their savings in property, potentially hindering downsizing and exacerbating housing market issues. Conversely, the Conservatives argue that inheritance taxes negatively impact economic growth. However, research by the Organisation for Economic Co-operation and Development (OECD) suggests that inheritance taxes generally have a less detrimental effect on economic growth compared to taxes on earned income.