The big news in tax-land today is the Conservative Party’s announcement that under a future Conservative government, ‘family homes’ would be taken out of Inheritance Tax (IHT). Individuals would then have an additional £500k each (or £1m for a couple) of other assets they can pass on free of tax. CenTax Director Professor Arun Advani explores the implications.
Distributional effects
Obviously, the winners of this policy would be people that are already relatively better off. That is no surprise. Few families pay Inheritance Tax. That number is rising, but it is still a minority, with only around one in ten families paying IHT (fewer deaths are covered by IHT because for people who were married, it is usually paid only on the second death). Benefitting the better off doesn’t necessarily make it a good or bad policy – it is obviously a matter for political parties to choose their distributional priorities, but it is worth being clear about.
Even among better off people, there will be some very large winners. There are houses in the UK that sell for tens of millions of pounds. Not many, but some. Those would now also come out of IHT, even where the beneficiaries would in many cases inherit other assets from which the tax could have been paid.
Geographically, beneficiaries will largely come from families in the South East of England. Currently main homes are much more likely to be taxed by IHT in London and the South East than in other parts of the UK, because they are more expensive. Beneficiaries of this policy would therefore be those whose parents or grandparents live in those areas. One implication of this is that houses in these areas will come up on the market less often, and presumably the goal is that these homes stay in the family. Losers, therefore, are people who might have wanted to move to these areas, but now cannot, or are faced with inflated house prices.
Growth
By exempting housing specifically, the proposed policy creates a clear incentive to not downsize. Plenty of people already don’t want to downsize, partly because there is currently some extra IHT benefit for main homes. Under this reform you should really not want to, because main homes will be completely IHT-free. This is particularly true if you live somewhere where housing is expensive, so the £1m allowance wouldn’t be sufficient to exempt you from IHT.
The problem is that “somewhere where housing is expensive” mostly means “somewhere that lots of people want to live”, usually because there are good jobs. Reducing housing sales in these areas will be bad for growth. Young working families trying to upsize will find it harder to do this, and by staying put they also make it harder for school leavers and university or college graduates to move to the area.
This issue arises because the policy treats main homes differently from other assets, encouraging people to hang on to their homes, even where that may, in older age, no longer be the place that is most comfortable for them to live. Reducing the headline rate of IHT across all assets, or raising the tax-free threshold, would not have had the same impact.
Administration
People often complain about the length and complexity of our tax code. These sorts of changes are exactly why. Once main homes are exempt, there is an incentive not only to hang on to your home, but potentially to try to upsize and have a larger home that counts as your main home. Presumably, if this were being brought into law, HMRC would be tasked with writing some rules to prevent this. Maybe there will be a minimum length of time you have to have lived in your ‘main home’. But what if you die unexpectedly young, shortly after moving? They will need an extra rule to think about that. And so on. We can’t have a simpler tax system if we want a complex structure.
For completeness, I note for the tax lawyers reading this and who are itching to point it out that we already have a downsizing relief which is intended to try to reduce the disincentive to downsize described above. In the small number of cases where people discover these rules exist and manage to follow all the processes correctly, this allows them to make use of the current residential nil rate band even with downsizing. These rules are already complex, and they will come under more pressure when the potential value they are covering gets larger.
Rationale
It’s worth reflecting here on the presumed goal of this policy: that family homes stay within families. Yet in Britain today, the average person dying is in their 80s and their kids are in the 50s, a group unlikely in practice to want to move back to ‘the family home’ and who in many cases will have children or even grandchildren of their own.
A final thought. Many people worry about IHT and think they will pay it, despite the stats showing they won’t. One of the main reasons for this is some people in their 50s, 60s and 70s live in homes that they can see are valuable enough to be covered by IHT, and so they imagine they will pay. In many cases, they will fortunately live many more years, but (unfortunately) in many cases they will need to pay for social care. This means that many families face seeing their homes sold before they have the opportunity to pass them on.
7 October 2026
About the author
Arun Advani is Director of the Centre for Analysis of Taxation (CenTax) and Professor of Economics at the University of Warwick.
