The chancellor Rachel Reeves is being urged to launch a £2bn inheritance tax raid on family homes by scrapping the £175,000 residence nil-rate band in the Budget on 30 October.
According to the Resolution Foundation there was “a good case” for abolishing the allowance which allows homeowners to protect an extra £175,000 of their wealth from inheritance tax.
The left-leaning think tank wrote: “This is a complex and distortionary relief, first introduced in 2017, and costs around £2bn a year.”
Reeves accused the Conservatives of introducing “a tax break for a wealthy elite” when they came to power in 2010, vowing to take the family home out of the inheritance tax net.
She wrote in a 2011 article for the Guardian newspaper: “The phased changes of this iniquitous and ill-conceived plan are due to start in April. It is a tax break for a wealthy elite, at a time when the NHS faces a cash crisis and the Government is moving to cut £3.7bn in disability benefits from the most vulnerable in society.
“Raising the [inheritance tax] limit to £1m for couples will do nothing for the vast majority of ordinary families. In fact, it’s likely to help just 0.04pc of people in England and Wales.”
In addition to the £325,000 nil-rate band, homeowners can use the residence nil-rate band to shield £175,000 from tax. It means individuals can pass on a total of £500,000 without paying inheritance tax. Couples can share their allowances, leaving behind a maximum of £1m tax-free.
Consequently, a married couple with a £800,000 home and £200,000 worth of other assets would have no inheritance tax due on their estate.
However, if the residence nil-rate band was scrapped, they would only be able to pass on up to £650,000 of wealth before incurring a 40% charge. Therefore, abolishing the extra allowance would cost their family £140,000.
Official figures show that 25,800 families claimed the extra allowance in 2021-22, sheltering £6.5bn of property and saving £2.6bn in the process.
The chancellor has warned she will have to raise taxes in the autumn in order to fix a £22bn black hole in the public finances.
Sean McCann, of insurer NFU Mutual, said: “The complexity of the rules, particularly when downsizing or selling up to move into residential care, and the fact that many are unaware of the extra tax-free allowance, adds to the likelihood that it will be scrapped as a simplification measure.”
The Resolution Foundation said that if the chancellor overhauled the whole system, she could introduce a 20% and 30% inheritance tax rate, with 40% reserved for estates worth over £1.5m.
The Institute for Fiscal Studies, another think tank, has previously recommended abolishing the residence nil-rate band and extending the nil-rate band from £325,000 to £500,000 to make the tax system fairer.
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