Sunday, January 11, 2009

A free lunch for heirs

One easily anticipated, but generally unforeseen consequence of the popping of the housing bubble is that inheritance tax thresholds are now starting to look absurdly generous.

Last autumn Gordon Brown allowed himself to be bullied into increasing an already generous tax-free allowance of £312,000 (only 6% of estates liable) to £350,000 by 2010. Much of the argument for this was based on the 'unfairness' of taxing ordinary people who had had the bad luck of inheriting homes worth hundreds of thousands of pounds after a decade of inflation (already a shaky case - why shouldn't beneficiaries of an unearned windfall be taxed?).

Now, of course, house prices are collapsing and even fewer estates will fall into the net. £350,000 is just short of the average London house price in 2007, but this has seen a decline of nearly 20% over 2008, and more declines are predicted. The average UK price was £210,000 the same year, now closer to £165,000.

Of course, falling out of a tax band because an asset loses value is not a win-win situation, but to the extent that housing inheritances are reinvested in the housing market, those who inherit stand to gain because the asset's value in this market is retained, but it becomes tax-free. Given that hardly anyone had to pay the tax even before this give-away, and the ease with which it is legally evaded, the bottom 95-6% of the population end up giving the top 4-5% a housing 'tax credit' worth maybe a couple of billion pounds per year.

Wasn't new Labour about governing in the interests of 'the many, not the few'?