Cutting inheritance tax on homes is nuts – it’s just going to make the housing crisis worse

I suggested to some colleagues recently that a good way to deal with the UK’s ‘misallocation of housing’ crisis would be to start taxing the over 65s for excess space: perhaps a tenner a year for every square foot over 1,000 they each owned in housing.

I was joking, of course. But the joke was made in the course of a conversation about how to persuade the nation’s retired empty-nesters to downsize and free up family homes for younger people (pushing prices down along the way).

A better way to address the issue would be with less stick and more carrot. We could cut stamp duty for downsizers, or abolish it all together for specific types of housing (more ideas from RICS here).

One of the reasons that the retired don’t downsize (so they tell me) is because they aren’t sure where to downsize too. In our new long-lived society, we need  hundreds of thousands of smallish but not tiny houses with smallish but not tiny gardens within walking distance of community shops and services, and close to the kind of leisure facilities that those aged 60- 85 (the long bit of retirement before most of us need care) would like to use. We don’t have them.

We could encourage (or allow) builders to build them. There are some good ways to deal with this problem, should anyone care to address it. (I have high hopes. It seems to me that the new pension freedom rules recognise and address the fact that most of us are both sentient and mobile for a good 20-30 years of retirement. Perhaps the house builders will soon notice this too.)

But there are also some really bad ways to deal with this problem. One of those is being floated by the Tories today. They have suggested that they might cut the rate of inheritance tax (IHT) on family homes so that a main home worth up to £1m could be passed on IHT-free.

This is clearly nuts. It doesn’t incentivise downsizing; instead, just like the fact that no capital gains tax is charged on primary homes, it encourages everyone to buy and keep the largest and most expensive house they can. Which, as I understand it, is rather the opposite of what policymakers say they want.

IHT needs reform. Of course it does. I have ideas on this (see my columns on replacing IHT with a gift tax). But none of them involve changing the tax laws to encourage people to hoard what is generally considered to be one of our more scarce resources.