Today’s announcement by George Osboune, that the Tories will give a Tax Break for passing on homes, is just a Tax Avoidance Scheme that will have many unexpected consequences. It will:
- push up house prices
- reduce the quality of end-of-life care
- encourage the Financial Services sector to create new products aimed at reducing Inheritance Tax
Hype and Facts
What the PM Said
“Our plans today show that if you have an house worth under a million pounds you should be able to pass that on tax free to your children.”
This is not quite the same as the policy on the Tory’s website.
What the Conservative Website Says
“We will introduce a new transferable ‘family home allowance’ of £175,000 per person. For a married couple, this will effectively increase the Inheritance Tax threshold to £1 million.”
What is in the Tory Manifesto
“And we will take the family home out of tax for all but the richest by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million, with a new transferable main residence allowance of £175,000 per person.”
Separating “Spin” from Fact
The PM’s “spun” story assumes that the only asset a person has on death is a house. It further assumes that the person is able to use all other their previously deceased partners Inheritance Tax allowance. Neither can be assumed to be true. Most people who would be subject to Inheritance Tax own homes and other assets such as money in the bank and stocks and shares. So we have to take the PM’s “spun” story with a pinch of salt.
The PM’s “spun” story also mixes up a single person’s Inheritance Tax threshold and the total Inheritance Tax threshold that they may have at the time of death. The PM says that “Today the Inheritance Tax threshold is £325,00 so potentially a quarter of the houses in our country are at risk.” But then he expresses the Tory plan based on a person having their partners Inheritance Tax threshold being passed on.
Based on the PM’s assumptions, only those with houses valued at more than £650,000 are currently subject to Inheritance Tax – not the £325,000 implied by the PM.
Push Up House Prices
By making a home a special asset class it will encourage more people to see a house as an investment rather then simply a place to live. This will increase the number of people wanting to buy houses. As there is a finite supply of houses for sale the law of supply-and-demand will apply – as demand increases so do prices. This will make it even more difficult for people to get on the housing ladder.
The elderly would need to live in homes with a value more than £350,000 to benefit from this tax break. The allowance seems to be a cap on the maximum that will be exempt from Inheritance Tax. There would be less tax to pay on a deceased person’s estate if it comprises of a home valued at £500,000 and other assets of £500,000 than for an estate of a £100,000 home and £900,000 in other assets. In the first case there in no Inheritance Tax due; in the latter case the tax due would be £100,000.
Reduce the Quality of End-of-Life Care
If owning a home could increase a person’s Inheritance Tax threshold by £350,000 then people going into a care home will have a very difficult choice. If they need to sell their house to pay for their care fees they will have to sell the whole house. It is not usually possible to sell 10%, or any other percentage, of a house. As soon as they sell the house they will have a great deal of cash. Even if that cash is invested it not have the benefit of the extra £350,000 exemption from Inheritance Tax. They will have, in an instant reduced their Inheritance Tax threshold by £350,0000 which could result in up to £140,000 extra Inheritance Tax.
Could they take action to keep the house and pay care home fees? Yes. They may have other assets that could be sold but they may need to use a care home with lower fees. They could rent out their house but that may give rise to a Capital Gains Tax liability when it is sold. They will need expert financial advice – not quite the best idea when someone is in a care home.
It is most likely that this tax break will not be of benefit for those that need to go into a care home. They will have to sell their home and Inheritance Tax may have to be paid on the cash received from that sale.
Encourage the Financial Services Sector to Create New Products Aimed at Reducing Inheritance Tax
The Financial Services Sector already has many products for reducing – and eliminating – Inheritance Tax. They will, no doubt, find other ways to use this tax avoidance scheme to create products that will make it even easier to reduce Inheritance Tax.
This is a silly proposal. It will further distort the housing market. The only way for it not to distort the housing market is to simply raise the Inheritance Tax threshold to £1,000,000. Maybe that is what the Tories are aiming for.
All major political parties seem to want to reduce tax avoidance. By proposing this tax avoidance scheme you have to question how serious the Tories are about reducing tax avoidance.