Family home death tax exemption could ‘distort property market’

A full Inheritance Tax exemption for family homes would distort the property market, a financial expert has warned.

Conservative Party leader Kemi Badenoch pledged this week that the family home will be exempt from Inheritance Tax if the Tories return to power.

The policy risks encouraging people to buy larger properties than they need and then hold on to them in retirement rather than downsize.”

Badenoch, whose party was in power for 14 years and introduced a main residence nil-rate band of £175,000 but kept Inheritance Tax thresholds frozen, said there would also be a £1million death tax allowance for couples.

But while the move has been welcomed by many, alongside a promise to scrap Stamp Duty, Ian Dyall (pictured), Head of Estate Planning at wealth management firm Evelyn Partners, warns that it could have some unintended consequences for the housing market.

Property market risks

He says: “By making it more attractive to pass on a family home entirely exempt from Inheritance Tax, 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, such a 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. That would also make it more difficult for younger families to access suitable homes.”

There is a wider risk, says Dyall, that the policy would reinforce the idea of the family home as a tax-efficient vehicle for intergenerational wealth transfer.

He adds: “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, and after all 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 Inheritance Tax than selectively favouring property.”

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Author: Gemma