Inheritance Tax fears are slowing up the housing market - David Alexander

9th May 2024
David J Alexander
Inheritance Tax fears are slowing up the housing market - David Alexander - D. J. Alexander

A change to the payment threshold would increase the number of larger homes available for families in the next generation, writes David Alexander.

There are clear signs that the housing market is about to receive a boost with lower mortgage rates expected in the coming three to six months. Inflation is falling, and there are growing calls for interest rates to start to fall to ensure the economy is not depressed by the current Bank of England base rate.

But there remain further issues in the housing sector which may require a more nuanced and complex response. Analysis produced by my firm last week found that average detached house prices in Edinburgh had risen by over £1,000 a week over the last 12 months with a similar figure in Glasgow and Midlothian. This is due to the continued popularity of our two major cities and surrounding areas coupled with demand seriously exceeding supply. The result is soaring prices substantially above the historic norm resulting in these incredible increases.

A further reason, however, has recently been cited by lenders who believe that older homeowners are retaining properties which are too large for them for fear of losing valuable inheritance tax (IHT) benefits. The IHT threshold currently stands at £325,000 with a 40 per cent tax charge for every pound over this figure.

As the value of most estates is in people’s homes the loss of the additional £175,000 parents can pass on to their children before incurring IHT is incentivising these older individuals to retain their higher value, larger homes in a bid to maximise their tax relief.

The result is fewer, larger homes available for the next generation and the consequent increase in the value of detached homes which largely fall into this category.

A change to the IHT thresholds which recognised that parents want to be able to pass on the largest amount of money to their children tax free would be a complex piece of legislation if it was to be implemented but would have the beneficial affect of increasing the number of larger homes available for families in the next generation. A potential solution would be to increase the IHT threshold to £500,000 for owners with children, allowing them to sell their homes without being penalised.

There is a further step that could be taken by the Scottish Government which would release many larger homes and encourage older owners to sell and buy somewhere smaller. If a zero rate of land and buildings transaction tax (LBTT) was to be applied to house purchases which were the last to be undertaken by individuals, then this would immediately free up many properties which could be used by families and others.

Many older owners are reluctant to move because a substantial part of the equity they release on their larger property is being swallowed up in taxes charged on their next home so they are remaining in properties that they would otherwise sell to move somewhere smaller and more manageable.

This further block on the supply is contributing to the rising prices of larger homes as demand far exceeds supply but a relatively simple proposal which allowed older homeowners to declare that this would be their final house purchase would release many properties on to the market. Obviously, there would need to be some sort of proviso which prevented this system being abused but it would release many more homes on to the market at a time when younger buyers are being denied larger properties.

David Alexander is CEO of DJ Alexander Scotland Ltd