I have some quibbles about SDP gains from Labor, but I'd continue as follows:
The Alliance runs into immediate problems. There are only so many government posts to hand out, and members of both halves feel disgruntled. Meanwhile, Labour ditch Foot pretty sharpish and a Kinnock/Hattersley team begins to rein in the left. After Militant are purged from the Party, some miffed SDP MPs discuss returning to Labour. Matters come to a head when the budget for the military is considered to high by the Liberals and a Commons motion on the matter is only won by the government with Labour backing. This rehabilitates the "patriotic Labour" voters who voted SDP last time, and when a number of SDP MPs do defect to Labour, resulting in a virtually hung parliament, a General Election is called in November 1985.
The result is a Labour majority and government. The Liberals hold most of their seats but the SDP become the official opposition, and under Owen's leadership break any links with the Libs and start to be seen not as an alternative to Labour but as the inheritors of the Tories. A few Tory MPs also defect to the SDP, sealing the deal.
Slowly, the Conservatives become a social set, with their local associations getting more and more separated from actual politics. The "bright young men" that commentators noted were going straight from University to the Tories in OTL are going to the SDP. The 1989 election is run on the economy, the second recession being blamed on Labour ineptitude, but with Liberals standing as a separate party the slogan "you can't trust the SDP" becomes the ultimate factor. Labour fail to win an outright majority but form a government with Liberal support. The rest, well, the rest isn't history.