Kemi Badenoch’s inheritance tax gambit is a Conservative classic. After all, it was George Osborne’s high-profile pledge to “take the family home out of inheritance tax” in 2007 that put Gordon Brown off calling a snap general election.
In practice, Osborne’s plan involved a £1m threshold for inheritance tax – and given the global financial crisis had blown a hole in the public finances by the time the Conservative-Lib Dem coalition came to power in 2010, it never came to pass.
But the promise was grabby enough to change the political conversation – and contributed to Brown’s fateful decision not to go to the polls early.
So politically, Badenoch’s flagship policy may have merit. IHT, as policymakers call it, is notoriously unpopular. Families never likely to be liable nevertheless fret about their kids having to paying it, while a cacophony of highly paid tax advisers offer to help them avoid it.
The furious response to Rachel Reeves’s reform of the inheritance tax regime for family businesses and farms, with tractors streaming down Whitehall, underlined how unpopular it is.
But whatever its political logic, the Tory plan makes little economic sense. First, it’s worth pausing to underline how very wealthy the beneficiaries of this new policy are likely to be.
The latest data from HMRC shows that less than 5% of estates – the wealthiest 5%, that is – were liable for any inheritance tax at all in 2023/24.
And under current rules, by combining their tax-free allowances, a married couple can already pass on a property worth up to £1m to their children or grandchildren, without them being liable to pay a penny in inheritance tax.
Badenoch’s new, much more generous regime would permit a couple to pass on the entire family home, however valuable, without paying any tax on it at all; and for good measure an additional £1m in other assets. And the more valuable the property, the bigger the gain.
Clearly, in a sluggish economy where resources are stretched, there’s a question about whether that is the best use of the £6bn of taxpayers’ money the policy is reckoned to cost – compared with, say, investing in infrastructure where there might be the prospect of a return.
Total revenue from IHT is forecast to be about £9bn this year, rising to £15bn by 2030-31 – Badenoch’s plan would wipe out about half of that.
Worse than that though, it will create perverse incentives for older homeowners to do exactly what the economy needs them not to do, and hang on in a valuable property, for fear the proceeds of downsizing would be grabbed by HMRC .
The Tories claim they’ll also abolish stamp duty, helping to oil the wheels of the property market and encourage downsizing; but for the most valuable homes, the benefits of not paying 40% inheritance tax above the current threshold would be likely to more than overwhelm the boon of a tax-free move.
And that would be likely to mean far fewer family-size homes coming on to the market in the places up-and-coming buyers most need them to be available.
As Arun Advani, of the Centre for the Analysis of Taxation at the University of Warwick, points out, the biggest beneficiaries would be in areas where housing is expensive.
He says: “‘Where housing is expensive’ mostly means ‘where lots of people want to live’, usually because there are good jobs. Reducing housing sales here will make it harder for young working families trying to upsize. By staying put, they will in turn make it harder for school leavers and university/college graduates to move to the area for work. This is bad for growth,” he said.
Indeed, he points out there would even be an incentive for those who can afford it to “upsize” – moving to a larger house, which would then effectively shelter the asset from inheritance tax.
If Badenoch and her party want to shovel an additional £6bn of taxpayers’ money to the already-wealthy in the hope of winning back votes in the stockbroker belt, so be it – but she should not be able to claim the policy would be anything but bad for economic growth.
