There is something quite extraordinary about the Conservative Party apparently deciding that cutting inheritance tax should be a centrepiece of its attempt to recover its electoral fortunes.
Politico reports this morning that inheritance tax is expected to be a major focus of Kemi Badenoch's speech to the Conservative Party conference. The Times and Telegraph both suggest she might either cut the 40 per cent headline rate or raise the threshold at which inheritance tax becomes payable.
If that is true, it tells us a great deal about the modern Conservative Party. Unfortunately for the Conservatives, almost none of it is good.
Inheritance tax is simply not a significant concern for the overwhelming majority of people in the UK. According to the latest HMRC data, just 4.72 per cent of UK deaths resulted in an inheritance tax charge in 2023–24. In other words, fewer than one estate in twenty paid the tax.
That fact matters because it puts the Conservative proposal into perspective. Young people struggling to find secure employment are not worrying about inheritance tax. People who cannot afford their rent, or who despair of ever being able to buy a home, are not worrying about inheritance tax. Nor are those relying on food banks, struggling with energy bills, or wondering whether their income will last until the end of the month.
Inheritance tax is instead an issue of considerable importance to a relatively small group of people who have accumulated substantial wealth and who would like to pass as much of it as possible to the next generation without making any further contribution to the society that has assisted the creation of their good fortune. There is nothing surprising about that: greed is as old as the hills, and most in the Tory party. There is, however, something very surprising about a political party now apparently believing that satisfying this desire should be one of its flagship policies for winning a general election.
That comment needs contextualisation. The current standard inheritance tax rate is 40 per cent, but that rate is only charged on the taxable part of an estate above the available allowances. The basic nil-rate band is £325,000, and the residence nil-rate band can add another £175,000 in appropriate circumstances. Unused allowances can also be transferred between spouses and civil partners. In many cases, this means up to £1 million can now be passed on tax-free.
As a result, the headline rate gives a deeply misleading impression of the tax actually paid. HMRC says that even among those estates that did pay inheritance tax in 2023–24, the average effective tax rate was just 13 per cent.
So what exactly is the national inheritance tax crisis that Kemi Badenoch is seeking to solve? In blunt terms, there isn't one. There is instead a political obsession amongst a relatively wealthy minority, amplified by parts of the media and by politicians who appear to spend rather too much time talking to people who look remarkably like themselves.
That is what makes this proposal politically revealing. Britain has profound economic problems. We have a housing crisis, failing public services and people unable to see a GP or dentist. Younger generations face extraordinarily high housing costs. Millions of people suffer economic insecurity. Real wages have stagnated, investment is inadequate, and enormous inequalities in both income and wealth persist.
Faced with all that, the Conservative Party appears to have looked around Britain and concluded that one of the most pressing problems requiring its attention is the tax bill faced by fewer than one in twenty estates. That is not serious politics. It is the politics of a party that has lost touch with the country it wishes to govern.
There is another issue here as well. Inheritance is, by definition, unearned by the person receiving it. No one chooses the family into which they are born. No one works to acquire an inheritance before receiving it. Inherited wealth is the consequence of circumstances over which the recipient had no control. At the same time, millions of people who work for everything they have are taxed on the incomes they earn. The Conservatives apparently think that reducing the taxation of inherited wealth should take priority.
That says something important about their conception of society. They remain deeply concerned with preserving accumulated private wealth and its transmission between generations. They appear much less concerned with creating the conditions in which those without inherited wealth might thrive.
A political party seeking government should be asking what prevents people from living secure, fulfilling lives and what government can do about those obstacles. It should be thinking about housing, employment, healthcare, education, social care, climate change, inequality and the provision of the infrastructure on which everyone depends. Instead, the Conservatives appear to be asking how they can make already substantial inheritances larger.
That might appeal to some of their remaining supporters. It might please some newspaper proprietors and columnists. It might even win back some affluent voters who have deserted them. But it does not amount to a programme for government.
The real significance of this proposal is therefore not inheritance tax itself. It is possible for reasonable people to debate its design, its allowances and the reliefs that should apply. That may be a minority sport, but I am not saying it is beyond the boundaries of sensible tax debate. The important question is not that, but what the choice of inheritance tax as a flagship political concern tells us about the Conservative Party.
It tells us who they are thinking about, whose anxieties they hear and, most importantly, about the enormous number of people whose anxieties they apparently do not hear at all. A party that thinks inheritance tax is one of Britain's great political problems has ceased to understand the problems facing most people in Britain.
That is why this proposal will not restore the Conservative Party to its former position. It might instead help explain why it has become a fringe party and why, unless it begins listening to the concerns of the great majority rather than the wealthy few, it is likely to remain one.
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Richard,
Why not do one of your excellent infograph on Inheritance Tax to fully explain to the vast majority of the population what it is all about and how it will only effect a few of them.
If I get time.
As you rightly point out, Professor, the Tories are obsessed with inheritance tax because their media megaphones (and by extension, their donors) are obsessed with it. Another reason they may have settled on the subject is as a point of difference from the platform proposed by the cigarette and pint-wielding ghoul. The appearance of chasing him down the rabbit hole of a tiny state with authoritarian powers of control won’t sit well with Tory Central Office.
From Dan Neidle’s research – 20% of pensioner households potentially exposed, 40% over the line due to house price gains alone, produces only 1% swing in polls.
That’s not research.
That is speculation.
And he is firmly biased toward wealth.
Better to be biased towards creation of wealth than towards confiscation of wealth.
I am most definitely biased toward wealth creation. My career proves it. Who was your comment aimed at? Rhetorical, maybe?
House price gains are the very definition of unearned and anything beyond inflation should be taxed…..and heavily.
I have suggested ways they should be.
Your argument is well made and I would have thought that there’s not much to be said against it. However, there will be those who say “Ah, but what about the farmers?”
Small, family owned farms and other businesses where the sons and daughters typically work in the business must be exempted somehow, because the transfer of ownership on a death isn’t like winding up a household or estate. It’s more of a continuation with a change of ownership. Do we charge similar rates to inheritance tax on business takeovers?
Tell me why wealth should pass in this way?
At a macro level, what is the gain?
I know the micro one. Now tell me the macro one.
Why isn’t it advantageous for farms to be sold?
Farming does present a particular problem. Many big farms are owned by big corporations, some land is owned largely as an asset. Small farms are the hardest to make a living on, farmers have a high average age; who is going to grow our food for us?
I understood that if a farm was passed on before the death of the farmer, taxation could be avoided; necessary on smaller farms to be viable units. If it is sold, then tax on the rise in property values applies. But who then buys it, and do they farm it? We need to grow more of our own food, farming is in crisis, wildlife declining.
How to keep land in farming, support farmers to farm in a sustainable way, and allow younger people to come into farming, with the prospect of being more than a labourer? We need more farmers; their average age is high, farms have got bigger, they are a rare breed. Decades ago, there were farms and smallholdings owned and let by County Councils. Tenancies can only work if rents are controlled.
High mechanisation and low labour came about under the subsidy systems after WWII, together with market forces. Now the high price of oil and fertilizer (and supermarket buying power) is putting immense pressure on farmers; is this the point when state investment is needed to diversify farming methods, allowing new techniques and technologies, allowing more people to work in food production? How heart-breaking for a farmer to realise that their their child or children would have to take on an immense burden to continue farming; I think the right support and policy would help make small farms more viable and cause the huge holdings to shed some land to provide opportunity for others, including land for reasonable rent.
You provide my preferred answer.
“Decades ago, there were farms and smallholdings owned and let by County Councils. Tenancies can only work if rents are controlled.”
That’s the required direction of travel.
I spent 6 months WWOOFing in the Blackdowns. Agricultural land didn’t use to be as expensive so ordinary farmers could buy a farm. Now this is not the case and the farmers I saw worked very long hours and were asset rich and cash poor. The area was an ANOB so housing was very restricted so you had the position where if they can’t pass the farm on it will be sold to a wealthy land owner not an ordinary farm. The view of farmers is very distorted. Yes you have some very rich farmers owning mega estates and employing staff, but the vast majority have massive debt and live on a very limited income be it in a beautiful place.
I am very much for inheritance tax and think the reliefs should be reduced so more is paid not less, but I have sympathy for those with small family farms which will not be sustainable if they have to sell land to pay inheritance tax. Some way needs to be found to distinguish between those seeing agricultural land as a form of investment and genuine family farmers.
Well it really only becomes wealth when it’s sold and its value is realised. The value of a farm, as a farm rather than as anything else, lies in its providing a living for those who work on it, as a source of food for the wider population, and also supporting wildlife by creating and sustaining habitats.
Why does everything have to be reduced to a monetary value?
A Renoir is a work of art, but we ascribe a monetary value for IHT. Why are farms different?
I don’t understand why small, family run farms should be treated any differently, in terms of inheritance tax, from small, family run shops, or small, family run manufacturers. Are there many of any of them?
I understand that, often in these businesses the family members work for less pay than they should get, but that just means those businesses are not really viable. However, surely there is a simple solution. Turn all the small, family run businesses into Ltd companies, with all family members holding shares. Then inheritance tax will only be levied against the shares held by the deceased share holder.
That does not really work…I have not got the time to explain why
FYI explained here:
Why inheritance tax charges are really good for real farmers – but not for financial whizz kids
So, the farmers actually should want an inheritance tax charge on this land because if there was an inheritance tax charge on this land, it would no longer have a value for financial purposes. It would only have a value for farming purposes. And for farming purposes it has no value at all, which means actually they could pass on their estates to their children however they like with no tax charge arising. It solves their problem to have an inheritance tax charge.
more
https://www.taxresearch.org.uk/Blog/2024/11/19/why-inheritance-tax-charges-are-really-good-for-real-farmers-but-not-for-financial-whizz-kids/
and
Farmers need to stop talking nonsense
https://www.taxresearch.org.uk/Blog/2024/11/19/farmers-need-to-stop-talking-nonsense/#gsc.tab=0
Why should small family farms or businesses be treated as a special case? This supposes there is something special in the genetic lineage of farming families or small businesses owners. Respectfully that’s utter tosh. Have you not come across the old addage, ” from rags to riches to rags in three generations”?
What treating farming, for example, as a special case does is allow the wealthy to use agricultural land as an inheritance tax avoidance strategy. They buy agricultural land that they have no intention of farming and rent it out. When they expire it is passed on without the usual inheritance tax ” because agricultural land is a special case”. What really happens is that agricultural land is overpriced because it has become an asset class. Then small farms are asset rich but income poor. Those from non farming families have no chance of ever buying agricultural land because it is overpriced. We prevent them from becoming farmers. If farmers were treated as everyone else this wouldn’t happen.
Any small farmer who is asset rich could sell up. If they received a few million they could live comfortably. They say they don’t want to give up farming. OK, fair enough, their choice, but I have little sympathy if they complain about their low income. Similarly I have little sympathy for their children who inherit a lot of wealth. They too could live comfortably should they choose to sell. Why should farmers or their children have a hereditary job? What makes them so special? Why should they be favoured over other young people who would love to farm but don’t come from a farming family?
Wealth is wealthy. Treat everyone fairly by treating them the same. Farmers whinging is just special pleading.
The most pressing problem with inheritance tax is that plenty of estates in the nil-rate bands are gobbled up by the cost of social care for the legator, and the government is dragging its feet on doing anything effectual about it.
Your solution is?
Root-and-branch reform of the social care system.
You say “Why isn’t it advantageous for farms to be sold?”.
(1) It depends who buys them – another venture capitalist?
(2) To my mind that response sits uneasily with your comments in other posts, even just today, about the folly of relying on markets.
OK, I’m sure I’m economically naïve among the commentators here, but surely there is real value in enabling a going concern to keep going, especially something like farming which has such a bearing on the sustainability of food supply in this country. It also has the potential to be randomly unfair, when chance events such as extreme weather can make the difference between adequate profit (and maybe even being able to pay inheritance tax) and serious loss.
I have formerly argued for inheritance tax on farms, but after the way you expressed that, I’m not so sure. There is surely a fundamental difference between the inheritance of static wealth in bank accounts (by all means tax as one element of reducing inequality) and the value of a business (which could be destroyed by what might be seen as a forced sale).
Paul
I have undertaken valuations of businesses for many purposes. Such factors are taken into account when relevant but markets cannot be ignored for this tax and not others, or for farmers and not other people.
My only caveat is that some people – hopefully not too many! – who dream of being well off (and that is how the imported American style capitalist dream works) will be attracted to this and vote accordingly.
It goes back to that really strange word for the Neo-liberal dreamworld we inhabit: ‘aspirational’ and those who vote on hope for themselves only – not their neighbours.
Any vote won like this for the Tories is one vote far too many for a party than needs to disappear down the plug hole of history.
It seems to me that the real issue is that land and house prices have far exceeded affordability
After all if you can’t afford the inheritance tax on a farm because it doesn’t make enough money to pay it then something is very wrong
In the same way the cost of building has increased in line with inflation since WW2 but in real terms house prices have increased by a factor of 3
Now going back to the early 80’s you might inherited on average a year or so’s earnings when your parents died now coupled with smaller families it could be up to a decade worth
Tackle asset prices and inheritance tax is much less of an issue
I am much inclined to agree.
Inheritance tax (IHT) should be maintained and strengthend. It is a vital tool to redistribute wealth. Abolishing or cutting inheritance tax would bring about untaxed inter-generational wealth transfers that entrench inequality.
In terms of the “family farm tax” otherwise known as the reforms to IHT relief on agricultural land proposed in the 2024 Autumn Budget, around 500 people where land was worth more than £2m (£3m if they were married) would have had IHT levied on their bequest – albeit at half the rate. The original proposals have been watered down. The number of estates claiming agricultural property relief affected by the reforms in 2026-27 halved from 375 to 185 – in effect 190 people.
In the main, IHT has become a voluntary tax. The wealth of the “Great houses of England” and their estates are largely untouched by it. As are the leafy suburbs. The nil-rate band projects the image that the typical property may be liable for IHT when in fact this is not the case. It is certainly a tax which needs to be reformed, but as a tax which needs to go up rather than down.
“Inheritance is, by definition, unearned by the person receiving it.”
Exactly. This fact gets left out all too often. IHT is a tax on the living not the dead.
“A party that thinks inheritance tax is one of Britain’s great political problems has ceased to understand the problems facing most people in Britain.”
The play on IHT is not about the facts but a psychological play on fairness and hard work designed to get support from those it will never affect in the service of the few it will.
Because they are, effectively and historically, the party of property, and the free disposal of that property to their chosen successor is part of the definition of property for mortal men and women.
The left, historically were the parties of industry (liberal left, Mill), and labour (Marx). Now, when economic rent and profit of enterprise are both considered equally valid forms of extraction, whatever the differences in effect they may have on different parts, or classes of the populationn in deindustrialising nations, the liberal left are the party of property management (and a snobby metaphysics of valdation).
There might be an argument in here, but I am struggling to find it beneath the language.
If your point is that we should distinguish between rewards for genuine enterprise and economic rents arising simply from ownership, I agree. I have made that distinction repeatedly.
But dressing that fairly straightforward point up as a “snobby metaphysics of validation” does not make it more profound. It just makes it considerably harder to understand.
Only the middling sort pay IHT. The super-rich have their tax havens. But among these middling sort, their main asset is invariably the capital value (price) of their house. Or rather the house value plus the land value. A house similar to one in Burnham-land that costs £250,000 will easily fetch £500,000 in Kemi-villas.
The difference is the Land Value. Instigate a full LVT, house prices near-equalise throughout the country. Very few of the middling sort will incur IHT. It’ll catch some of the super-wealthy though, because there’s no way can they transfer their houses and land to Monaco!
Tax havens do not help the rich with IHT now that we have automatic information exchange. I helped deliver that.
And this is not a role for LVT.
While the Tories are crap, another party has been putting in work that might be of interest to you Richard.
Quietly, The Green Party have passed motion C05 at conference.
I’ll just give you little teaser here:
With debt denominated in its own currency (sterling) and a floating exchange rate policy, the real fiscal space available to the UK government is determined by the availability of real resources. This includes, labour, materials, and productive capacity produced domestically, as well as our capacity to import both intermediate and final goods and services from abroad.
I feel like you could have written that.
Some key features are:
End to using interest rates as a means to control inflation caused by external shocks
An answer for what to do about the propaganda masterstroke that is the OBR
An end to the “full funding” rule by returning to the tap system
Banking reform to divest from fossil fuels
Publicly owned community banks
Green Bonds
and more…
I’d love to to hear your opinion on all of this. In my opinion the Green Party just took a massive leap forward and that this is a massive win for those of us who support a Politics of Care.
I greatly assisted the writers of that motion.
It does not mean I wrote it all.
It does not mean I am a Green.
It means they asked, and I helped.
I approve of a great deal of it. It would be odd if I did not.
It’s worth remembering that the 40% rate of IHT is reduced to 36% providing that at least 10% of the estate is left to charity.
My father’s will did this and so does mine. Whether or not I leave enough to pay IHT, I’d still like to help the causes that I think are worthwhile.
Anyone who’s wealthy enough to leave an estate on which IHT will be levied should do the decent thing and leave something to the good causes that they support. There is, after all, a huge choice.
A headline policy….to attract donation. Donation needed today, rather than votes tomorrow.
Rather than having an inheritance tax levied on an estate, why not treat all bequests as income which is taxed at the recipient’s marginal rate?
Is that too simplistic?
It is plausible.
I would still give a lifetime free allowance – basically to save admin.
But it would be a better tax.