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An inherited tax overhaul: The first step to combating the housing crisis

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Rich and poor deserve the same access to housing, so let’s level out the playing field

council estate

One of the main causes of inequality in the housing market is inherited wealth.

Without inherited wealth it is becoming increasingly hard to access the housing market, given that Piketty suggests that labour income is no longer enough.

It is my view that the young without family wealth should have the same opportunities and access to the housing market as those with family wealth. Inequalities are allowed, it is not that everyone should be treated exactly the same. However, when a lack of wealth has an impact on people’s opportunities it becomes problematic.

For example, if one 18-year-old inherits £1m, and a different 18-year-old inherits nothing, they do not have equal opportunities to reach property ownership. It is easy to predict which one will be able to access the property ladder first. This is unfair and it is hard to believe that if society could start from scratch and create a legal system it would desire this.

The current legislation on inheritance tax only taxes the deceased’s assets in the last seven years (subject to a few exceptions, for example, where estate passes to a partner). This part of the law I find little problem with.

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It is not detrimental to the housing market (or the rich); if individuals want to pass on the wealth, they must pass it on seven years prior to their death. It is, of course, hard to predict your own death, but the general incentive is there to downsize. This creates fluidity in the market, for example the seven year requirement encourages the retired to downsize to a smaller, more suitable home so that the wealth locked up in the family home can be passed on earlier. This helps the young and those on low-incomes because there are more family homes available.

If there are more houses available, then there is less of a ‘housing crisis’ and less demand. If we continue to increase supply, then the effect should be for prices to be lowered. This would effectively make the housing market more affordable (and therefore fairer).

Obviously this alone would be insufficient to solve the housing crisis. It might lead to a situation where the 18-year-old, in the previous example, is now competing with the retired couple for the smaller houses. However, the answer to that is simple: increase supply of smaller homes. This means family homes are still affordable for those who need them and smaller homes will not increase in price because there will be more available.

There are some fundamental problems with inheritance tax. For example, individuals are only taxed after the assets exceed £325,000. This means that already there is a large threshold to attain before government can tax it. This encourages the perception that you have to have to have ownership of your property (rather than rent) to be successful: someone with full ownership is going to be more likely to have assets exceeding £325,000. This means that children whose parents have full property ownership are more likely to have a decent sized inheritance. This does not seem fair! By reducing the threshold, we could achieve two things: first, raise more money for public spending (which is becoming increasingly necessary). Second, reduce inequality based on what family you were born into.

Once assets are taxable, it is taxed at a rate of 40%. In other words, children are allowed to have 60% of their parents’ wealth. The issue here is this: they did not work harder than their poorer competitor. Luck of birth is at play here. Further, family size is at also at play, if a person splits their estate between their eight children and then another splits their estate between two, the latter significantly benefit from that.

I am pre-empting two main criticisms. First, people would say parents are allowed to spend their money however they desire to do so. I accept that — but surely to a limited extent. If it is not to a limited extent, then you are saying there should be no tax system. I doubt many are in support of that. Therefore, that argument is flawed. The parent’s money already has lots of legal limitations in place, all I am suggesting here is that we take it further.

Second, some would say the parents have already paid tax ‘first time round’ on their labour income. To them I would say this: do you think stamp duty, car tax and other forms of tax that come out of your labour income should be scrapped? These too involve being taxed a ‘second’ time. Further, in our everyday lives we see someone’s interest being balanced against someone else’s interest. I am suggesting that the priority here should be ensuring the young from low-income families are not barred from the property ladder.

Wealth is allowed to pass down the generations. Full state interference is not what is desired, nor proposed, here. Instead, it is about leveling out the playing field.

Therefore, I propose that an inheritance tax that started after £100,000 and was taxed at a rate of 60% would be sufficient to achieve what I have set out. It would not prevent individuals from wanting to own their home. It would however, mean that children from rich families are not at as much of an advantage. It would enable labour income to play a role in likelihood of property ownership.

These proposals for how we should regulate property for fairness would not solve the housing crisis. There would still be issues to address, for example, the need for more affordable homes.

However, the current system is not fair. Tax is necessary to fulfil the lifestyle we, as British citizens, want. Inheritance tax is a good way to achieve this. Further in the current housing climate, leveling the playing field can only be a good thing. Hopefully the government realises that their legislation affects real homes occupied by real people. A home is more than just a financial value, it’s a place to feel safe and call your own (regardless of whether you have full ownership). It’s key that the younger generation (without rich parents) do not miss out on the stability that their parents had. It is fundamental that the luck of birth does not determine an individual’s likelihood of owning their own home.

Jade Montagna is a final year law student at the University of Bristol.

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17 Comments

Ellie

The housing crisis really is a crisis. Gov action needed immediately

Anonymous

Thanks for this. Could you tell me where bears do their business?

Anonymous

Don’t have time to fully respond to This article, so apologies for that, but it is poor (sorry). Many arguments are essentially “because it is fair”, which doesn’t take into account the fact that the vast majority of Brits want to see the end of inheritance tax, or at least have the thresholds raised so only those living in ‘mansions’ are affected.

There is weak arguing throughout, with the need for tax in general at one point being used to justify a specific tax.

Pretty hard left stuff LC

Samantha

Bit harsh. And young people tend to sway to left wing ideology so don’t think that’s too shocking

Sonia Din

You are right that current legislation affects real homes occupied by real people however your proposal on lowering the £325,000 inheritance tax threshold to £100,000 and raise the rate of tax from 40% to 60% is at odds with the statement. Although a noble idea lowering the IHT threshold and increasing the rate of tax could force those beneficiaries on lower incomes to liquid the inherited assets (in most cases property) to raise funds to pay the higher rate of tax in essence losing their ‘family homes’. It may also potentially lead more people with assets to find ways to avoid paying taxes through offshore trusts which does not help situation at all. I agree more needs to be done to deal with the housing crisis but I am not convinced that raising taxes is the solution.

OxfordLawGrad

Left wing bollocks (excuse my French)

Anonymous

Sacre bleu!

Anonymous

Toxic Tory spotted.

Anonymous

Unbelievable . Penalised for accumulating capital and wanting to provide for your family . This is garbage.

Comrade Jade

That money belongs to the proletariat, comrade!

Anonymous

Lowering the threshold and bringing £225,000 more within a charge to tax will hurt someone only able to leave a modest family home than it will someone able to leave millions. Can’t imagine that’s what the author wants. Not very well thought through.

Anonymous

“…individuals are only taxed after the assets exceed £325,000. This means that already there is a large threshold to attain before government can tax it. This encourages the perception that you have to have to have ownership of your property (rather than rent) to be successful…”.

What? Just because someone has reached a threshold whereby they are subject to tax it simply doesn’t follow that they are therefore successful (and by extension those not at that threshold are not successful.

Anonymous

Why stop there? Lets enact legislation that completely disincentives people to work hard for themselves and their family.

Yes the housing crises needs to be tackled, but not tackled by penalising those who have worked hard to put themselves in a position where they can pass on £325,000 (which is far from excessive) to their children.

Anonymous

“For example, if one 18-year-old inherits £1m, and a different 18-year-old inherits nothing, they do not have equal opportunities to reach property ownership. It is easy to predict which one will be able to access the property ladder first. This is unfair and it is hard to believe that if society could start from scratch and create a legal system it would desire this”

Why? So you’re saying the fictional founding fathers of a new civilisation would prefer someone not be able to leave money to their children? What’s the brilliant alternative we are all missing – should they have a will that spreads the funds amongst everyone in their town equally?

Anonymous

This is outrageous. Taxing more will not end the housing crisis.

Building more social housing will help. If the government cannot handle the financial burden, move it to corporate social responsibility and make housing/construction projects build more social housing to qualify for permission to build.

Only 6% of England is built on yet there is a housing crisis?

Why are people constantly going to be penalised for their parents success or non success?

Why does the shortfall always negatively impact the people in the middle (which is what lowering the threshold and increasing the amount would do)?

Tyrion

Lets tax people more….why…because its unfair if people leave money to their kids….why….because its unfair if they buy a house with the 1 million….how does that solve the housing crisis to tax them more….it doesn’t it just means fewer young British people can buy houses as fewer have inherited wealth but those from overseas can buy as much as they like…..oh so it won’t work….

This post has been moderated because it breached Legal Cheek’s comments policy.

Anonymous

Mmm. Wait until you’ve worked for 20 years and then see how keen you are on tax…

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