Chancellor George Osborne has said Conservative plans to remove family homes worth up to £1m from inheritance tax “supports the basic human instinct to provide for your children”.
It means more owners of homes in the UK would be able to pass them on to their children without paying tax.
The policy is likely to be at the centre of the Tory election manifesto, which will be launched next week.
Labour said the Tories had promised such a move before and did not deliver.
Deputy leader Harriet Harman contrasted the idea with Labour’s plan for a “mansion tax”, saying “people face a big choice”.
“It’s becoming clearer and clearer as we get to the election how actually the Tories are helping a few people – and we want everybody to be better off,” she told BBC One’s Andrew Marr Show.
The £1bn cost of the Conservative policy will be paid for by reducing tax relief on the pension contributions of people earning more than £150,000, says the party.
In other election news:
- Labour has been setting out plans to raise an extra £7.5bn a year through closing tax loopholes and imposing bigger fines on tax avoiders
- Labour has also announced proposals to give victims of sexual offences the right to challenge decisions by police not to prosecute suspects
- The Lib Dems are to set out their plans to eliminate the deficit by 2017/18, through raising taxes by an additional £12bn, cutting public spending by £12bn and cutting welfare by £3bn
- The latest BBC poll of polls has Labour on 34%, the Conservatives on 33%, UKIP on 14%, the Lib Dems on 8% and the Greens on 5%
At present, inheritance tax is payable at 40% on the value of an estate in excess of the tax-free allowance of £325,000 per person. Married couples and civil partners can pass the allowance on to each other.
If the Conservatives win the general election on 7 May, parents will each be offered a further £175,000 “family home allowance” to enable them to pass property on to children tax-free after their death.
The new “family home allowance” can be added to the existing £325,000 inheritance tax threshold.
The total will be transferable on the death of one spouse and added to the other spouse’s allowance, to bring the tax-free total up to £1m.
- Raise the personal allowance from £10,600 to £12,500
- Remove family homes worth up to £1m from inheritance tax
- Raise the starting point for 40% higher tax rate from £42,400 to £50,000
- No rise in VAT
The full amount would be transferable even if one member of a married couple has died before the policy comes into effect, the Conservatives say, and so would benefit existing widows and widowers.
For properties worth more than £2m, the new allowance would be gradually reduced so that those with homes worth more than £2.35m would not benefit at all.
The new allowance would come into effect in April 2017 and be available to married couples and civil partners, even if one of them has died before that date.
Mr Osborne told BBC One’s Andrew Marr Show: “Conservatives support the basic human instinct to provide for your children. And we believe that your home that you’ve worked for and you’ve saved for should belong to you and your family, not the tax man.
“So we will take family homes out of inheritance tax, we will effectively increase the inheritance tax threshold to £1m, so that only millionaires pay inheritance tax.”
It was a message repeated in a speech by Mr Cameron, who said: “You should be able to pass it (your home) onto your children. And with the Conservatives, the tax man will not get his hands on it.”
Analysis, by Carole Walker, Conservative campaign correspondent
David Cameron will be hoping his pledge to take the family home out of inheritance tax will galvanise his campaign in a week which will be critical for his prospects of staying in power.
When George Osborne promised to raise the inheritance tax threshold to £1m back in 2007, he delivered a huge boost to Tory morale and put Gordon Brown off holding a snap election. Subsequent promises to take more people out of the tax have not been delivered. The threshold has been frozen since 2009 and rising property prices have dragged tens of thousands more families into the inheritance tax net.
His opponents are already questioning whether voters will believe this latest promise. The announcement is likely to appeal to middle class voters, particularly in London and the South East. But it also opens the Conservatives to the charge they are helping the wealthy. David Cameron’s team deny this – pointing out that it will be paid for by reducing pension tax relief for high earners and that many ordinary families now have to pay the tax.
It is however a marked contrast to the promises from Labour and the Liberal Democrats to impose a “mansion tax” on expensive properties.
But shadow treasury secretary Chris Leslie, for Labour, said the policy was the latest “panicky promise” from the Conservatives.
He said: “The Tories made a promise on inheritance tax before the last election and they broke it.
“At a time when our NHS is in crisis and most working people are paying more under the Tories, it cannot be a priority to spend £1bn on a policy which the Treasury says would not apply to 90% of estates.”
‘Damage work incentives’
Liberal Democrat Chief Secretary to the Treasury Danny Alexander said the Conservatives had “the wrong priorities”.
He added: “It is extraordinary that the Tories will go into great detail on a policy that will cut tax for a small number of estates, but steadfastly refuse to give any detail at all on the massive cuts to public services that they desire.”
However, when asked whether the Lib Dems would block the proposals if they ended up back in coalition, he declined to say he would, instead saying: “I’m saying I strongly disagree with it. Our priority… is further increases in the income tax personal allowance… we’ve stopped things in this parliament including cuts to inheritance tax for millionaires.”
Paul Johnson from the Institute for Fiscal Studies told the BBC that “owner-occupied housing is extremely tax privileged” already, adding that the policy did not address the lack of housing and could drive house prices up “in the long run”.
And he claimed that the policy, coupled with the reduction in pension tax relief for the highest earners, could have a “damaging effect on work incentives” by “taking from high earners and giving to those living off the unearned incomes left to them by their parents”.