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Why the government shouldn't help people on to the property ladder
Whatever the arguments for changing the IHT rules, helping first-time buyers shouldn't be one of them, says Tom Bulford.
Speaking on Question Time on Thursday night Caroline Spelman, the Chairman of the Conservative Party, explained the reason why her party is now committed to raising the inheritance tax threshold to £1m. It was, she said, to enable first-time buyers to get on the housing ladder. No more and no less than that.
Well, whatever the arguments may be for changing the inheritance tax rules this should not be one of them. Let's be honest for a moment. Raising the IHT threshold is a move that benefits the rich at the expense of the poor.
It makes our society less of a meritocracy and more of a plutocracy. It appeals to the understandable wish of parents to featherbed their children. And it appeals to the greed of the latter who like the idea of being given lots of money that they otherwise would have had to work hard for.
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The Conservative Party's initiative, and the response from the Labour Party, is little more than a pre-election bribe that has struck a chord in a nation where the promises of politicians are considered to be worth a good deal less than the certainty of tax-free money in the bank.
The debate over inheritance tax has to consider what is fair, and nothing else. This is complicated. Most people see it from their own perspective. I have earned money. It is not fair to prevent me from passing it on to my children.' My parents wanted to pass their wealth to me. It is not fair that the state is confiscating it.'
What is 'fair' anyway?
But there is another consideration that rarely gets mentioned. Is it fair that some young people start out on the struggle to make a living with nothing, while others do so with a few tens or hundreds of thousands in the bank? Who is standing up for the poor, disadvantaged children in our society? No one.
But anyway, let's come back to Caroline Spelman, and her apparent infatuation with home owning. I bought my first flat back in 1980 for £17,950. The interest payments on a loan of up to £8,000 were subsidised by my generous employer down to a rate of 4%. But a much bigger break came from the Government, which at that time allowed tax relief on any mortgage loan up to £25,000. This scheme has been introduced in 1974, and was eventually abolished in 2000, in order to remove a distortion' from the housing market.
In fact two things had happened. House prices had gone up to such an extent that tax relief on a loan limited to £25,000 did not make much difference. And it was recognised in some quarters that the consequence of the increased affordability' had simply been to push up house prices so that first time buyers still had to stretch themselves to get on the ladder.
This same problem applies to Caroline Spelman's argument. Lifting the inheritance tax threshold will put more buying power into the fists of first time buyers. This will not make houses any more affordable. It will simply drive up their price. What is more, to the extent that it benefits anyone, it will help those who by definition come from well-off households and probably have least need of any assistance. Meanwhile those with low earnings power and no inherited wealth will find it even harder to acquire their own home.
How to make housing more affordable
In any event, the government of the day should not be encouraging home ownership. I am not saying that I am against home ownership. I am just saying that the government should stand aside and let the market take its course. But there are three things that it could do to make housing more affordable.
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One of these is already Labour Party policy, and is to alter the supply/demand balance by building three million new homes by 2020. To put this in perspective there are today around 23m homes in the UK, so this is a considerable increase and will without doubt involve building on green belt land, and putting even more pressure on our overburdened transport system. Frankly the prospect is alarming.
The second, and much the best, is to act upon the demand side of the equation by reducing the number of people in this country. This is not easy, for two reasons. First of all, as life expectancy improves, not enough people are dying each year. And second despite the fact that 385,000 people emigrated last year (no doubt appalled at the prospect of living in an overcrowded, over-taxed country) they were more than replaced by 574,000 immigrants.
So there is already considerable upward pressure on house prices, and putting more cash into the hands of buyers will only make this worse. But there is a third alternative
We have to stop seeing homes as 'investments'
That is to make it the perceived investment value of housing much less attractive. A very important reason why we all like to own a home is that any gain in its value comes tax-free. Any gain on any other asset is taxable. This is a real incentive to buy as big as house as possible, perhaps with an eye to downsizing in later years. But money that goes into depreciating buildings does nothing for the economy.
Think how much better off we would all be if the billions tied up in our homes were used to finance business and industry, in other words to create real wealth. As the Barker Report in 2004 put it Constraining supply (of houses) means that resources which would have been used for housing are instead used for other potentially less beneficial purpose or not used at all. This leads to an inefficient allocation of resources creating a deadweight loss. One counterfactual simulation suggests that if real house prices had risen in line with the European average since 1975, the UK would be £8bn better off.'
But most people think of their home as not only a place to live, but also a tax-free investment. So the third alternative would be to either make capital gains on all other investments free of tax as well. Or else to apply the new 18% CGT rate to gains made on selling one's home. I prefer the former.
This article is taken from Tom Bulford's free daily emailPenny Sleuth'. For more information pleaseclick here
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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International, he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.
