One of the biggest issues in the UK is the problem of affordable housing. For those wishing to buy, prices remain intimidatingly expensive. Renting doesn’t have or require the security, but is often more expensive than purchasing. The benefits debate gets stacks of people angry at headline values of £20k and more, when the biggest payment a recipient might receive is for housing, which goes directly to the landlord. But if the housing stock is overpriced, it makes sense that rental values are overpriced. This is of benefit to the current rentier class, and a significant burden on the poor. A system where, continually only 7% of the population control 50% of the value of the property assets is not one that makes sense for an economy where we’re all in it together .
And given that we all need a home, I wanted to set out some thoughts on the problem, and the solutions.
Ever since I was a lad, the idea of property ownership has had me a little muddled.
Let me explain. I see the world as one of many creatures on the planet, and the planet is 4.54 billion years old. It’ll probably be around in some form for a few billion years more too. And, within that time, the crust will get recycled in most places. So it’s a bit daft that we think we own a little piece of that crust. But I understand that if we’re not to have anarchy, it’s best that we can divvy it up and have a little piece to ourselves each. That makes sense.
And, I’m reasonably comfortable with the idea that those of us who are more successful can have a bigger bit than some others, Or even a couple of bits. All views can’t be sea-views, and I’d appreciate those might command a premium. Or one’s next to a nice park, or bigger ones, or attractive ones.
But I’ve never really been able to tally that with the generational handover of inheritance.
Probably the main reason we want to own a home, as opposed to rent or lease, is that the space is ours. Or maybe it’s the capital accumulation. Hardly anyone starts off buying a massive house, it’s not even possible except for footballers & pop stars. The rest of us start small, and as the capital accumulates & our income increases, we can trade up. And then maybe again. And then over time the steady erosion of the initial debt via inflation makes the whole process even easier. I know my parent’s two grand house was really tough to pay for in their twenties, but by the time they finished paying for it, relatively it was a small cost. If that house was handed to me now, I could sell it, and take 3 or 4 years off work, or wait and retire earlier.
Or as Andrew Carnegie put it, ‘The parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would.’
Because the individual who created the wealth for the first purchase is the one who deserves the reward. If we allow each property then just to pass down to the next of kin, then that reward is no longer available to the next generation of successful or lucky individuals. And the next of kin doesn’t have the incentive to achieve [work] that the parent did. For the next generation, this gets even worse. The incentives to educate / work / contribute to society become slimmer the larger the property.
So by taxing the inheritance, we firstly encourage the parents to educate their children, so that they will be able to provide their own home, from their own incomes. Investments that work for the parents, the children and the greater society.
And it’s worth pointing out that what is being taxed is the increased value in the asset, the capital gain. It’s not a secondary tax on the income, as the net income is only paying for the purchase price, not the increase in market value.
And then there’s the issue of social mobility. There’s only a certain number of homes to go around. Taxes on inheritance provide for an exit route for the property from family A to the open market. By forcing a few sales, it helps the flow of housing, and probably keeps a lid on price bubbles. Those in society excluded from home ownership in this generation should still know that their children may no be so excluded – provided they can generate a decent amount of their own income.
Where we are now
The current UK coalition govt have ignored the housing crisis, preferring to let the rentier, landlord class enjoy the boom in rents. The buy-to-let ideal was based solely on the relative investment values of property, in an era when real wages were starting to decline. And all the main UK political parties have preferred to focus on income and expenditure taxes, rather than wealth.
Why? 2 reasons
- Because if the wealth accumulated in properties was taxed in the way the economists of the past [including Adam Smith] envisaged, then the house price bubble will finally pop. And it’s seen as vital to sustain this bubble as the inflated property values are the last visible entry in the asset category of most of our banks. That is, if properties were valued at the right level, and the subsidies to landlords were removed, and the mortgage market improved, the value of those assets at the banks would plummet. And so would the derivatives. And the still unspoken policy in the corridors of power in govts & central banks is to protect the banks at all costs.
- Because most of the politicians are the clueless children of wealthy parents, and their neo-liberal thinking has forgotten the first principles of economics & human societal behaviour in favour of a cut-down self-preservation strategy. They can preserve their unearned social status by maintaining their hold on land and housing. The last thing they’d want is to have to actually use their skills in the commercial sector [they wouldn’t get through the psychological profiling in the first place, if it wasn’t for the school ties and nepotism].
I hope I have established that an inheritance tax is a worthwhile, smart and fair tax for society as a whole, which helps to stimulate social mobility. With that in mind, a smart govt would set inheritance tax at a level similar to income taxation.
The current rate at which inheritance tax is payable is £325k, which is almost twice the price of the average home. In fact, only around 7% of estates fall under this threshold. And you can gift anything to a relative tax-free providing you don’t die within 7 years. So, the govt could start here, and reduce the level at which it’s paid, and eliminate the 7 year gift rule, and immediately start the process of reducing the level of wealth attached to property, and getting the market moving downwards.
Further, there are no or restricted inheritance taxes on business & agricultural land (generally speaking), but for each of those assets the main capital asset is the land or buildings. This needs to be taxed, fairly.
By the way, I think it’s vital that when HMQE2 passes, no cosy backroom deal is done on the estate.
In summary, in an era when it’s become more apparent that the centuries of progress in the UK have been undermined, and the feudal society is looking for a resurgence, many of the problems could be solved by forcing the re-distribution of property assets, and finding a fair price for them. And the policies that could change this are already in place, it’s just a matter of a govt forgetting the self-interest for a while, and putting the nation first.