THIS month’s report, The new wealth of our nation: the case for a citizen’s inheritance by the Resolution Foundation, aims to bridge the financial gap that has grown between millennials and ‘baby boomers’ which has attracted so much press in the last couple of years.
The gap is said to be “unfair” and based solely on ‘baby boomers’ being in the right place at the right time and the judgement of this report is that financial redress against the elderly is required to rebalance the situation.
To that end, the report proposes giving all 25-year-olds a £10,000 citizens inheritance which they can use for various purposes (education, pensions, or business), but most have assumed that it will be used to buy or rent a property.
The £7bn a year that this will cost will be paid for by introducing a lifetime limit of £125,000 on inheritance tax (IHT) on everyone with a tax of 20 per cent on anything above that figure up to £500,000 where a 30 per cent tax will be imposed.
This, therefore, is not a tax on the rich, it is a tax on everyone. It won’t just be the people who live in Harrogate and Ripon who will pay, it will be everyone, including the millennials who purchase a property or acquire other assets in their lifetime. As a tax on ambition this would be hard to beat and the assumption that older property owners are simply lucky is plainly wrong.
In the 1970s, 1980s and early 1990s acquiring a mortgage was reasonably difficult, with banks and building societies exerting considerable control over who received a mortgage and for how much. Therefore, most ‘baby boomers’ had to work hard and save for a considerable time to get a home.
That this home may now be worth many times more than they paid for it may be true but is it their fault? Are baby boomers to blame for the growing financial gap between young and old and should be punished or are they simply prudent homebuyers who have benefited from a substantial upturn in the market which they could not have foreseen?
The Resolution Foundation report would appear to be solving a real problem – a great shortage of affordable homes for first-time buyers – by potentially causing further problems. Is inheritance intrinsically wrong or is it not everyone’s right to pass on assets they have earned over a lifetime?
Everybody wants to transfer assets to their children in their lifetime or once they have passed away. Restricting this to fund £10,000 to every 25-year-old makes little or no sense as the most likely impact of this citizens’ inheritance will be to raise the cost of buying a home. If everyone has more money they will offer more to buy a property. In five years’ time the citizens inheritance will need to be £20,000 so that instead of resolving house price inflation you will simply have fuelled it.
The solution to the housing shortage is too much demand and too little supply. Therefore, actions by national and local government to increase the supply of social housing, as well as encouraging more investment by the private sector to build more homes and invest more in the rental market would, over time, reduce prices, give more people homes where they want to live and resolve this issue.
The premise of this report is that the financial gap between young and old is a permanent problem which can only be resolved by extreme measures which would impact upon the long-term financial planning and wellbeing of everyone in the UK.
A subtler and more lasting way to resolve this is to ensure that all parts of the property market – house-buying, renting, and social housing – are encouraged to increase the number and quality of homes so that everyone has somewhere to live.
David Alexander is managing director of D J Alexander, one of the largest family-run property management companies in the UK.