Inflation, Wages and Purchasing Power
Are Inheritance Tax Rules Jamming the Housing Market?
One media report posited that current inheritance tax rules are clogging up the property market by stopping older people from downsizing because they lack knowledge of the specific reliefs in place to prevent this state of affairs.
The report suggested that these reliefs which allow property owners to pass on more of their wealth when they die are having the unintended effect of encouraging elderly people to hold on to larger, more valuable homes that may not suit their needs so they can benefit fully from the tax breaks.
Family Home Allowance
The family home allowance, otherwise known as the residence nil-rate band permits home owners to pass on £150,000 of property wealth tax free, on top of the existing £325,000 standard inheritance tax allowance, if leaving a home to a direct descendant. In 2020 this increases to £175,000 and means spouses and civil partners, who can share their allowances, will be able to pass on up to £1m free of tax.
However some people, looking to pass on as much wealth as possible, have decided to not sell up and move into smaller homes – because these are less valuable – or into care as a result. This behaviour has the knock-on effect of exacerbating the shortage of suitable properties for younger, growing families and the lack of supply caused is a factor in driving up property prices and/or keeping them at higher levels, which filters down through the entire market, eventually pricing many first time buyers out of the market.
But a 'downsizing addition' in the rules allows someone who decides to move into a smaller property – and who therefore might, depending on the value of the smaller dwelling get less benefit from the property aspect of the relief – to be able to claim up to an extra £100,000 from remaining other assets in an estate not already covered by the central £325,000 tax-free allowance.
Some commentators have not only attacked the reliefs described as fiendishly complicated and have suggested that the solution might best lie in cancelling the downsizing provision and simply allowing anyone who has previously owned and lived in a home to be able to claim the entire family home allowance.
The above is highly likely to be a significant causal factor in the continuing depressed sales volumes affecting our entire housing market.
NAEA – First Time Buyers Hit Seven-Month High
The National Association of Estate Agents led with the number of first time buyers hitting a seven-month high in its most recent housing market report, for September, which we surmised was a large factor in the increase in mortgage approvals discussed earlier.
Although the NAEA member branches reported sales to this cohort as being the highest since February this year – it represented 30% of all sales coupled with a year-on-year increase of 8% - overall the number of sales agreed fell for the first time in four months. Additionally the number of prospective buyers fell by 11% and the supply of available housing decreased.
The NAEA's report surmised that the increase in first time buyer numbers partly resulted from low or no stamp duty on lower-priced properties while also suggesting that these buyers may have acted out of fear that the post-Brexit market might be an unfavourable one following a Brexit deal.
The report additionally forecasted cautiously that first time buyer sales would continue to rise, however much clearly will depend on the resilience of the economy. If we have a recession post-Brexit, the likelihood of a squeeze on wages and employment numbers greatly increases and the personnel that make up this group are likely to be hit harder than most by these effects, something which would have the knock-on effect of corroding their home buying ability.
You can't buy a house if you don't have a job…
Finally, the NAEA once again reported that the vast majority of properties – this month it was 83% – sold for less than asking price.
Brexit or no Brexit, this uncomfortable fact, which continues to defy the classic rules of supply and demand, persists and cries out to be addressed…
Andrew Boast, co-founder of SAM Conveyancing, said:
"The peculiar nature of England and Wales' housing market might make the new peak in average house prices less than remarkable as news and 'Brexit uncertainty' has more or less become a mantra used to explain retardant effects in many markets, including housing. But Brexit or no Brexit, there's no glossing over the persistent eyesore of flat-lining volume levels and it's only this factor which makes the new peak in prices more curious."
"Experts have provided some evidence that one factor in the sales volume slump is likely to result from our complicated system of tax and reliefs, in this case the family home allowance relief from inheritance tax. And it's a persuasive argument particularly because it's easy to see how it feeds down from the top to the very bottom of the housing ladder. The good news is that there is a possible - and relatively simple - solution to this particular problem, however it's unlikely to be the only reason for the stagnation."
"It's always refreshing to report a relative and absolute increase in first time buyer numbers. Additionally the fundamentals this month strongly suggest that the mortgage market at least is correctly responding to prevailing conditions: all things being held equal, poor housing sales volumes should encourage lenders to drop rates to encourage mortgage applications. This appears to be the case, with first time buyers in particular proving to be the winners."
"We hope at this point that the General Election will result in a clearly defined direction of travel and one where housing market practitioners can plan their strategies with increasing certainty. And if the future Government can pay proper attention to the housing market, with intelligent longer term policies addressing both supply and demand issues, we can hardly ask for more."
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