The Conservatives’ pledge to exempt the family home from inheritance tax could have negative consequences for the property market, warns Evelyn Partners.
During the Conservative party conference, opposition leader Kemi Badenoch vowed to scrap inheritance tax on family homes, while also allowing couples to leave £1 million tax-free.
Inheritance tax is fast becoming a key policy battleground among politicians ahead of the impending inclusion of pension assets into the scope of inheritance tax from April next year.
However, Ian Dyall, head of estate planning at Evelyn Partners, warns that the reforms could have “unintended consequences” for the housing market.
He explains: “By making it more attractive to pass on a family home entirely exempt from IHT, in a preferential treatment to other assets such as investments and pensions, the policy risks encouraging people to buy larger properties than they need and then hold on to them in retirement rather than downsize. This could also result in funds being diverted from productive investment assets and from saving into pensions.”
In turn, the policy could reduce the supply of family-sized homes coming back onto the market, particularly in areas where housing is already in short supply, adding to upward pressure on prices and making it more difficult for younger families to access suitable homes, Dyall said.
He added: “There is a wider risk that the policy would reinforce the idea of the family home as a tax-efficient vehicle for intergenerational wealth transfer. People may increasingly view housing not simply as somewhere to live, but as an estate-planning asset to be favoured over others.
‘The detail will be crucial but policymakers should consider carefully whether a tax break of this nature could distort housing decisions and discourage efficient use of the housing stock. For instance, a bigger rise in the nil rate band might be a cleaner way to alleviate broadening exposure of families to IHT than selectively favouring property.”
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