Why we shouldn’t exempt the family home from inheritance tax

London’s deputy mayor thinks the family home shouldn’t be liable for inheritance tax. This makes no sense at all, says Merryn Somerset Webb.

I'm completely bemused by this article in the Times today. It has London's deputy mayor on housing, Richard Blakeway, saying that one of the reasons older people won't downsize from large houses is because they "could gain a big profit which would be liable to inheritance tax when they die".

His solution is to "see if there are ways to protect this cash from inheritance tax" (IHT). This makes absolutely no sense whatsoever.

How much inheritance tax you pay does not depend on the manner in which you hold your assets. When you die, the value of the whole lot is totted up and everything beyond your nil rate band (£325,000, or £650,000 for a couple) is taxed at 40%.

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It makes no odds whether your assets are primarily made up of the house you live/die in, equities, other properties, cash, or anything else for that matter (contrary to popular middle-class belief, the fact that an item is so portable that you can hide it from the tax man does not technically make it IHT-free).

So in fact, the best way for anyone to avoid IHT is not to stay in their house, as Blakeway appears to suggest, but to sell it as soon as it is remotely feasible, downsize and give all the proceeds from the deal to their kids. That way, under the seven year rule, they should get to pass on a whole pile of money tax free.

People don't refuse to downsize because of IHT. They refuse to downsize because they don't want go through all the bother of moving house. Given this, what on earth is Blakeway trying to say? Answers below if you have them.

Making gains from primary homes both be capital gains tax-free and IHT-free would not only offer yet another break to the property-owning classes, it would also compound rather than solve any of our problems.

After all, if you knew that your house would have this kind of double tax-free status, surely you would make even more effort to leverage yourself to the hilt to pay for a whopper of a house than most people do already? Nuts.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.