IFS response to Conservative announcement about changes to inheritance tax

The policy announced by Kemi Badenoch today would be a big cut to inheritance tax.

Everyone who would have paid inheritance tax under the current system would benefit from the tax cut. The biggest beneficiaries would be those with the highest wealth and the most valuable homes – and their descendants. This is a very well-off group, mainly living in London and the South-East of England.

Cutting inheritance tax would increase the reward for working and saving to accumulate wealth to pass on, though the evidence does not suggest such effects are large.

Abolishing inheritance tax on people’s main homes while keeping it for other assets such as bank accounts and shares would encourage wealthy people to buy (or stay in) more expensive homes in their later years rather than holding their wealth in other forms which would continue to attract inheritance tax. That would be an unfortunate distortion to households’ portfolio choices and the housing market, preventing properties from being held by the people who value them most.

This policy comes on top of promises to abolish stamp duty land tax on main homes and cancel the planned ‘mansion tax’. This would mean, as Kemi Badenoch said, ‘no stamp duty when you buy your home, no mansion tax when you live in your home and no inheritance tax on your home when you pass it on to your children or grandchildren.’ One effect of this would be to push up the price of high-end housing, benefiting existing owners more than those who might buy such properties in future.

The proportion of estates subject to inheritance tax is rising rapidly. According to the OBR's March forecast, it was 4.6% of estates (1 in 22) in 2023–24, is expected to be 5.5% (1 in 18) this year, and is forecast to reach 9.5% (1 in 11) by 2030–31 – though those forecasts are quite uncertain, and sensitive in particular to what happens to asset prices (notably house prices) in the coming years.

In longer-term context, the proportion of estates subject to IHT has fluctuated around 5% for decades. It has often been on course to rise substantially above that (as it is now), largely as asset prices have risen faster than the inheritance tax threshold; but this hasn't happened in the end because governments have periodically introduced one-off reforms which have brought the number of taxpayers back down. At the moment there are no such reforms in the pipeline – indeed the threshold is frozen and reliefs are being scaled back, accelerating the increase. The Conservatives’ proposal could be seen as in line with the historical pattern of announcing periodic big reforms to keep/bring the number of IHT payers down.