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Balancing the housing gap between generations

The recent Intergenerational Commission report "A New Generational Contract" has come up with some innovative thinking about tax to help improve the balance between generations.

It says the present tax system is great for those with high-property values and good pensions, but they benefit at the expense of millennials who can’t get on the property ladder.

The case is that a more collaborative approach from all generations towards housing, pensions and wealth creation could result in a fairer economic situation to provide more opportunities for all.

Home ownership among the 25-34 age group has plummeted, due to the rise in house prices and the need to both fund substantial deposits and large mortgages to buy even a modest flat or small house, especially in the South-East.

Meanwhile the Bank of Mum and Dad is the nation’s ninth biggest funder of housing, according to a survey by L&G last year.

The commission would halve stamp duty land tax (SDLT) to support property purchases by first-time buyers, raise the first-time buyer  SDLT threshold to £300,000 from £125,000 (£145,000 in Scotland), and keep the higher rate duty on buying additional properties.

It wants to replace council tax with a progressive property tax which exempts the lowest-value 10% of housing in any area, and restrict future Help to Buy equity loans to those with an annual household income of less than £60,000– a third of borrowers admit they could have bought without.

The commission also says a time-limited roll-up of annual capital gains tax allowances should “incentivise exit from multiple ownership and facilitate an increase in home-ownership rates” – though the CGT would then be levied on death before the estate was valued.

It wants to replace inheritance tax at 40% on estates above £325,000 with a lifetime tax on recipients of all gifts. A 20% tax would kick in at £125,000 rising to 30% once gifts or inheritances passed £500,000.

The report is not explicit, but this would appear to catch gifts from the Bank of Mum & Dad, potentially crowding out much-needed support.

But the new  SDLT regime in particular already brings the tax treatment of the parental bank into focus. It is vitally important to think carefully, with good advice, about wealth protection.

The new first-time buyer relief from  SDLT (FTBR), introduced in the November 2017 Budget, does reduce the cost of that first home for many young buyers.

However, there are some inconsistencies with the higher rate charge for additional dwellings (HRAD) which slaps another 3%  SDLT at all levels onto the acquisition of any further property.

HRAD has a valuable de minimis amount, that disregards any interest in a property worth less than £40,000.

But it is vital to know that there is no de minimis for the FTBR. So if as an aspiring homeowner your parents (or anyone else) happen to have already given you a share of any residential property, even if its value may only be £5,000, you will no longer be a first-time buyer and will have lost your entitlement to FTBR.

When it comes to HRAD, there is a helpful provision which disregards for three years an inheritance from an estate, as long as it is no more than 50%. 

There is again no equivalent for FTBR. So if you inherit a share of an estate that includes a residential property you may well be treated as owning a first property, however small the share may be – even £5000 or less. So it is important to take advice and consider any action needed at an early stage in the estate administration.

The commission argues that ‘matched’ saving schemes from government help only the better off, so it would scrap Help to Buy and the new Lifetime Isa. That, along with the lifetime gift tax, would fund a £10,000 ‘Citizens Inheritance’ for all 25-year-olds  - which would curiously be phased in over a decade with £1000 for all 35-year-olds in year one.

These ideas from the commission are very much for the medium term, as the current hung Parliament and the priority of Brexit prohibit any new radical new ideas being considered just now. They are, in part responding to the Office of Tax Simplification’s current review of Inheritance Tax –which also looks more medium term.

Wherever the intergenerational debate may lead, the way that families plan with residential property, gifts of interests, and inheritances from estates, needs careful attention as there are so many different complex rules in this area.

Published: 23 May 2018

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May 2018

Key Contact

John Bunker