Oxford Economics Models Cost of UK Inheritance Tax Reform Proposals

As the United Kingdom faces rising inheritance tax liabilities hitting a record £7 billion in the latest HM Revenue and Customs data, Oxford Economics reported in October 2026 that a full inheritance tax exemption for primary residences combined with a nil-rate band increase to £500,000 would cost £6.0 billion in the 2029/30 financial year.

The Cost Disparity Between Oxford Economics and Tax Policy Associates

The £6.0 billion projection by Oxford Economics sits below alternative calculations released by Tax Policy Associates, which estimated the cost of the same policy package at between £7.7 billion and £10.9 billion. The discrepancy stems from differing methodologies in static costings and subsequent behavioural responses.

The static costing produced by Oxford Economics comes in at £6.2 billion in 2029/30. This figure is lower than the static estimates included in the Tax Policy Associates report, which reached £7.0 billion and £9.0 billion. According to Oxford Economics, the £9.0 billion estimate relied on data from Wave 8 of the Office for National Statistics Wealth and Assets Survey—a dataset that has had its accredited statistical status suspended. Oxford Economics utilized Wave 7 as its starting point instead.

Oxford Economics stated that its model for both inheritance tax liabilities and the percentage of liable estates closely tracked HMRC data over the 2019/20 to 2023/24 period. In back-testing, the Tax Policy Associates model significantly overestimated both measures.

Analysts Diverge on Taxpayer Reactions to Residence Exemptions

Beyond static estimates, the two analyses diverge sharply on how taxpayers will react to a primary residence exemption. Oxford Economics included an allowance for reduced tax planning as inheritance tax bills fall, lowering the projected cost by approximately £200 million based on prior economic literature applying an elasticity of taxable wealth of 0.2.

Conversely, Tax Policy Associates modelled additional behavioural adjustments that increased their policy cost projections. Their upper-bound estimate assumes that 15 percent of households’ taxable financial wealth will shift into their main residences to secure a 40 percent inheritance tax saving. While acknowledging that a full residence exemption creates incentives to invest in housing, Oxford Economics chose not to model this specific shift due to a lack of available precedent and a judgment that short-term impacts by 2029/30 will remain marginal.

Primary residences are non-productive assets, and over the preceding decade, average annual growth in UK house prices hovered around 4 percent, compared to global equities growth of roughly 12 percent including dividends. Combined with upkeep costs, potential capital gains tax bills reaching 24 percent, high pension withdrawal taxes, and stamp duty rates reaching approximately 10 percent on new property values, Oxford Economics concluded that major housing shifts make limited financial sense for most estates.

Broader Fiscal Pressures on UK Estates

The debate over inheritance tax modelling arrives as broader fiscal pressures expand the reach of the tax. The standard nil-rate band threshold has remained frozen at £325,000 since 2009. Due to fiscal drag, approximately one in twelve estates will be paying inheritance tax by 2029, representing more than triple the proportion recorded in 2009.

Controversy surrounding the tax intensified following reforms to agricultural and business property reliefs announced in the 2024 Budget. Financial strain is scheduled to increase further in April 2027, when the government brings pension funds and death benefits into the value of an estate for inheritance tax purposes. Unspent pension funds may face a double tax trap, incurring both a 40 percent inheritance tax charge and income tax rates of up to 45 percent when beneficiaries withdraw the funds at their personal marginal rates.