The housing market could take a hit if inheritance tax is reformed the way the Labour party intends, experts have warned.
Last month the Labour Party’s independent report on cutting inequalities in land ownership had called for the abolition of inheritance tax in a bid to stabilise house prices.
Under the plans, inheritance tax would be replaced with a lifetime gifts tax levied on the recipient on the gifts received above an allowance of £125,000. When this lifetime limit is reached, any income from gifts would be taxed annually at the same rate as income.
Since then the Office of Tax Simplification’s review of the IHT rules — which currently levies a 40 per cent charge on estates over £325,000 — has been published, calling for a reform of the seven-year gifting rule, alongside a new allowance and abolishing the tapered rate of Inheritance Tax.
Experts warned the ‘bank of mum and dad’ — which currently acts as the eleventh biggest UK lender in terms of buying property — would be scuppered by Labour’s £125,000 limit.
According to data from L&G, parents and grandparents will help buyers purchase a total of nearly £70bn of property wealth this year, much of which could be taken away by the taxman under the plans.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said a reform of IHT rules like the one Labour is suggesting would “fill parents with horror”.
She said: “Inheritance tax is already Britain’s most hated tax, but at least at the moment they can take steps to avoid it.
“They can pass as much of their wealth to younger members of their family throughout their lifetime as they want and as long as they live for seven years after making the gift, it’s not counted as part of their estate for inheritance tax purposes.”
The Labour report estimated that taxing gifts through the new system would raise £15bn in the 2020-21 tax year — £9.2bn more than under the current IHT system and in a ‘more progressive way’.
Last month (June 30) shadow chancellor John McDonnell confirmed the Labour Party was looking at the reforms in the report as a range of ways to distribute wealth more equally in the UK.
Ms Coles said the current rules on lifetime giving had helped encourage people to share their wealth within their family before their death and the earlier they make these gifts, the better from a tax perspective.
This means younger people benefit from payments when they need them most and the new rules would remove this incentive, she added.
Dan White, of White Financial Services, said there was “no doubt” that IHT could have an impact on potential buyers.
He added: “That said, if property prices drop then any potential ‘gift’ monies could be less relied on and may not require such large ‘gifts’ to help towards deposit funds.”
Ruth Whitehead, of Ruth Whitehead Associates, said: “The housing market could definitely take a hit as it would definitely impact on middle class families in the south of England trying to support their first time buyer offspring to buy in a very expensive market.
“But, Labour are only ‘looking at’ lowering the inheritance tax allowances. This would only come to pass if Jeremy Corbyn won a general election and became prime minister.
“Which isn’t going to happen any time soon, if at all. So I don’t feel that is, as yet, a matter of concern.”
By Imogen Tew
Source: FT Adviser