Conservative leader Kemi Badenoch has unveiled a sweeping reform of inheritance tax that would remove the levy on family homes and raise the threshold at which the tax kicks in. Speaking at the party’s annual conference, she said no one would ever pay inheritance tax on their main residence and that couples could pass on an additional £1 million free of tax. The pledge, framed as a response to rising wealth transfers, has sparked debate over who would truly gain and what the fiscal impact might be.
What the Conservatives are proposing
Badenoch’s plan contains two core changes. First, the nil‑rate band – the amount of an estate that can be passed on before inheritance tax applies – would increase from £325,000 to £500,000 for individuals. Second, the family home would be wholly exempt from inheritance tax regardless of its value. In practice, this means a married couple could leave up to £1 million of assets, including the home, without any tax liability, a figure the party says builds on the existing transferable allowances.
How the current system works
Under the present rules, inheritance tax is charged at 40% on the portion of an estate that exceeds £325,000. When a person dies, any unused portion of this threshold can be transferred to a surviving spouse or civil partner, effectively doubling the tax‑free limit for couples to £650,000. Additionally, each individual can claim a further transferable residence nil‑rate band of £175,000 when the family home is left to children or other direct descendants. Combining these elements, most married couples already have the potential to pass on £1 million tax‑free under the existing framework.
Who stands to gain and who loses
The Conservatives estimate that their reforms would cut the number of estates liable for inheritance tax from a projected 52,100 in 2029‑30 to about 22,000 by 2030. Official data shows that only around 5% of deaths in 2024‑25 resulted in an inheritance tax charge, a share the Institute for Fiscal Studies (IFS) expects to climb to roughly 12% by 2032‑33 as asset values rise and the threshold remains frozen.
Analysis by the IFS indicates that the biggest beneficiaries would be the wealthiest households, particularly those with high‑value properties in London and the South‑East. If inheritance tax were abolished entirely, the top 1% of estates – those worth £2.1 million or more – would capture half of the financial gain. The IFS warned that the policy would primarily advantage “those with the highest wealth and the most valuable homes – and their descendants.”
Critics also point out that affluent families already employ legal structures such as trusts to reduce their inheritance tax bills. HMRC data for 2023‑24 shows that estates valued at £10 million paid an average effective rate of just 18%, suggesting considerable scope for avoidance even under the current regime.
Cost and economic arguments
The Office for Budget Responsibility (OBR) forecasts inheritance tax receipts of £9.5 billion in 2026‑27, equivalent to about 0.3% of GDP, rising to £14.5 billion by 2030‑31 or 0.4% of GDP. The Conservatives, citing analysis from Oxford Economics, say their plan would cost roughly £6 billion per year by 2029‑30. The party claims it has identified £71 billion of annual savings, including £36 billion from welfare cuts, to offset the expense.
Professor Andy Summers, director of the Centre for the Analysis of Taxation, warned BBC Verify that exempting the family home irrespective of its value “is just about the worst possible way to deliver an inheritance tax cut.” He argued that such a measure would encourage older people to lock wealth into property, discourage downsizing, and further strain the housing market.
The Conservatives maintain that inheritance tax is “bad for growth,” yet OECD research suggests that, compared with taxes on labour income, inheritance levies are generally less harmful to economic expansion. This nuance adds a layer of complexity to the debate over whether the proposed cuts would stimulate investment or simply redistribute wealth upward.
Why it Matters
The inheritance tax proposal cuts to the heart of broader questions about wealth distribution, housing affordability and fiscal responsibility in the UK. By shielding family homes from tax and raising the nil‑rate band, the policy would deliver significant relief to asset‑rich households, potentially reinforcing existing regional disparities in wealth. At the same time, the projected annual cost of £6 billion raises pressing questions about how the government would finance the measure without undermining public services or increasing borrowing. Whether the plan ultimately encourages economic activity or merely entrenches inequality will depend on the balance between these competing forces, making it a pivotal issue for voters assessing the Conservatives’ economic vision ahead of the next general election.
