If newspaper coverage is to be believed, one of the Government’s main themes for tomorrow’s Budget is housing - helping people to get on the housing ladder and helping people pass their house on to their children. However, a number of policies that have been floated risk not only making the country even more unequal, in some cases they could ultimately prove counterproductive. In particular there is little suggestion that policies like cutting inheritance tax will effectively tackle the big problems of house building and property taxation.
The Government has proposed creating a special allowance in the inheritance tax system for a couple’s primary residence if they are leaving it to a member of their immediate family. This is justified on the basis that it ensures that people can pass on their family home to their children. The reality is that for most people this policy makes that harder rather than easier. The majority of home owners do not own a property that is worth enough that they would pay inheritance tax on it after their death. This is even true in London where the average house price is under £470,000, well below the current £650,000 inheritance tax threshold for couples. These home owners can already pass down their property unaffected by inheritance tax, which hits only 4.9% of all estates.
By creating a new allowance for property not only would the Government give the wealthiest 5% of families a tax cut, they would also distort the property market. As the IFS has stated, by giving property preferential treatment over other assets this would distort the tax system in favour of property wealth. This in turn can drive house prices higher and make it harder for people to get onto the property ladder, or at a more basic level, afford a place to live.
Additionally, as life expectancy increases inheritance makes less and less sense as a way of making sure that people can afford a home. Most people want to know that by working hard they can afford their own home. They don’t want to simply wait for old age and the hope their parents pass one down to them.
The bigger problem remains that our overall system of property taxation is fundamentally broken. Council Tax (the UK’s main property tax) is a regressive levy based on property values which are twenty four years out of date. This bizarre system means that the poorest household pay more both as a percentage of their income and of the value of where they live, than richer households. One of the results of this is that the poorest are taxed even though they aren’t benefiting from increases in the value of property, whilst the richest are barely being taxed at all on the large increases in the value of their house. This provides more incentives for them to collude with policies which push house prices ever higher as they keep almost all the gain whilst others suffer as they struggle to afford a place for their family to live. This a blatant injustice and one the Government must urgently tackle. A good first step would be to re-evaluate properties and create extra council tax bands for high value properties, putting money back into the pockets of most people in the process.
The other elephant in the room is the need to simply build more property. One of the ways that policy drives up house prices is restrictions on planning permission and other policies which stop houses from being built. To their credit the Government is doing something to address this by releasing underused public sector land for more homes to be built on. But this remains woefully inadequate. The Government plans to build 200,000 new homes over five years and 150,000 from releasing public sector land. Shelter estimates that the UK must build 250,000 homes every year (over a million in five years) just to stand still with demand. If the government wants to make it easier for people to afford to buy a home they will need to build even more.
Instead they should tackle our broken council tax system and build more houses.
Government housing policy has been shambolic for years, but there is a real opportunity for this Government to address this and in doing so address our extreme levels of inequality. We don't need to help millionaires pass on wealth to their children, but we do need to help ordinary middle income earners who are struggling to pass anything down or afford a roof over their heads. That should be the focus of Government housing policy in tomorrow’s Budget.
Tim Stacey, Senior Policy and Research Advisor