Inheritance tax is making housing crisis worse, say building societies

Inheritance tax is creating friction in the home buying market and making the housing crisis worse, building societies have said.

A report has found that Britain’s property tax system is “ineffective” and incentivising older homeowners to keep living in homes they no longer need. Mortgage lenders are calling on the Government to review inheritance tax, criticising tax breaks on homes worth £175,000 per person. They say these tax breaks are encouraging homeowners to remain in larger homes in later life to capitalise on the allowances, but said they could be reformed to free up homes and help younger buyers on to the property ladder.

Paul Broadhead, head of mortgages and housing policy at the Building Society Association, which authored the report, said: “We want the Government to remove as much tax friction as possible at the point of sale, to improve liquidity in the market and free up more stock.

“If you have a large estate and a potential tax liability, this incentivises owners to remain in larger homes. These, of course, aren’t necessarily first- time buyer homes. But introducing more liquidity into the market allows families to keep moving up and down the [property] ladder and this – in turn – does free up more first-time buyer homes.”

The Telegraph’s campaign to scrap inheritance tax has been widely backed by MPs. The death tax is charged at 40pc on wealth over £325,000. Individuals then have an extra £175,000 allowance towards their main residence if it is passed to children or grandchildren, and spouses can share their allowances – taking the allowance to £1m between a married couple.

There is a downsizing policy, which ensures the full £175,000 allowance can be retained, even if a homeowner moved into a property worth less than the protection the tax relief provides. But it is not widely understood and the Office of Tax Simplification has previously called it the most complicated aspect of this aspect of inheritance tax. The “residence nil-rate” band also only applies if an owner has children and leaves the property – or the proceeds from it – to their children in their will.

Mr Broadhead said reform of the policy could be paid for in part by making changes to council tax – a system where bands are based on property values from 1991 in England. Revaluing properties in line with today’s prices would result in large council tax rises for homeowners in London and the South East, where prices have risen most.

The BSA also made a series of other recommendations to reform lending rules and help first- time buyers, including a regulatory change that would allow lenders to issue more 5pc deposit mortgages.