By David Alexander, Managing Director
Lucky beggars these baby boomers. Born roughly during the ten years succeeding the Second World War, they were fortunate enough to enter the jobs market at a time of virtually full employment and once married, had the choice of a subsidised council house or to become the owner-occupier of a reasonably-priced semi on a mortgage with a deposit as low as 5 per cent.
That at least is the view of the Resolution Foundation, the think tank that recently called on all 25-year-olds to be given a £10,000 “inheritance bonus”, thus reducing the gap between today’s young people and those born in the late 1940s and early 50s. To pay for it, inheritance tax (IHT) would be replaced by a “lifetime receipts” tax of 20 per cent on any assets above £125,000 and 30 per cent above £500,000. The gap is said to be “unfair” and based solely on baby boomers being in the right place at the right time, in which case financial redress against the elderly is required to rebalance the situation.
The payment would be used for further education, pensions, starting a business or the deposit on a house: let’s focus on the last of these. My first objection is to giving £10,000 of public money to any 25-year-old as a “right” and without any effort on his or her part – something certainly not available to those “lucky” baby boomers when they were that age. However, assuming the money is used for a deposit on a mortgage (and not to pay off credit card debt or to spend on electronic gizmos and holidays) then £10,000 will not make a great deal of difference.
In London, where the average deposit for a first-time buyer is said to be over £100,000, this amount of money will just about buy a rabbit hutch or a garden shed. Yes, there are parts of Scotland where £10,000 will be enough to secure a mortgage, but the properties involved are likely to be repossessions and/or located in areas in which a lot of young people – particularly middle-class types – might not like to live.
Anyway, the ability to secure a mortgage is not just about finding the deposit. Stung by the high incidence of negative equity, thanks in part to “light touch” regulation before the financial crash that resulted in a loan-to-value rate of up to 125 per cent, banks and building societies are increasingly anxious about the ability of applicants to maintain their repayments over the lifetime of a mortgage. Added to this is insistence by government on detailed background checks. A friend of mine who has been “fixing” his mortgage for two-or three-year periods rather that stick with the standard variable rate told me that the last time he secured a deal, the amount of box-ticking (and checking if bank statements and utility bills) had increased enormously since his previous agreement just two years before.
Another flaw in the Resolution Foundation proposal is the compulsion aspect. The cost to operate it is estimated at £7 billion a year, while government income from inheritance tax for the last known full year (2016) was £5bn – so more people will pay tax whether they like it or not whereas individuals do have a measure of control over the IHT on their estates after they die. One such measure is the decision to give gifts above £3,000 a year to children which – if the IHT threshold of £325,000 is breached – will incur IHT of 40 per cent should the provider die within seven years (the rate does drop over that period but it’s a slow process). This leads to the rather unsavoury situation of older parents having to juggle payments to children with the prospects for their own health.
It seems therefore that a more sensible alternative to the Resolution Foundation’s proposal would be to allow parents to give more cash to adult offspring (eg for a mortgage deposit) without the risk of it attracting 40 per cent tax somewhere down the line. This should run in tandem with a substantial increase in building social housing so that young people not fortunate enough to have cash-rich parents still have the prospect of securing a warm, safe and affordable home.
This article originally appeared in The Scotsman on 7 June 2018 titled “Baby Boomer bashing won’t solve housing crisis”.