David Alexander comment: ‘Help to Downsize’ would be a novel suggestion

David Alexander comment: ‘Help to Downsize’ would be a novel suggestion

In a House of Lies, the latest Rebus novel by Ian Rankin, currently tops the best-selling paperbacks list however, according to reports, the Edinburgh-based author has not written anything significant for the last 12 months after suffering a shoulder injury during a recent house move. Rankin and his wife, Miranda, sold their eight-bedroom, Victorian-build mansion in the capital’s Merchiston district and purchased a £2 million penthouse flat in the Quartermile development as their two sons are now adults. The author is said to have made a profit of £500,000 from the sale of the house, in which the family had lived in for 16 years.

This move is a typical example of high-value “downsizing”, although the practice is not uncommon within the middle market as well. There are two advantages: permitting older homeowners to find more manageable accommodation and releasing a sizeable amount of equity tied up in the former property. Recently, older owners of high-end properties have been deterred from downsizing because the smaller property they would like to move to will still incur a sizeable chunk of Land and Buildings Transaction Tax. As this column pointed out last week, by 2023 the number of property transactions free of LBTT will drop from a half to one-third, so even more potential downsizers may think twice.

Up to now, the cash benefits of downsizing has enabled some older vendors to complement retirement income and take holidays that were previously unaffordable. Just as typically, they will use the money to help adult children, especially boosting them onto the housing ladder. And should they survive for the next seven years, any money gifted will not become liable for inheritance tax (IHT). Cash tied up in property offers no such get-out opportunity.

There are good reasons for encouraging downsizing through tax concessions other than the boost it would give the property market. The resultant cash access could release billions of pounds – currently tied up in homes – into the economy through consumer spending and investing in company shares. Some people will – understandably – ask why their taxes should be used to subsidise relatively well-off older homeowners. In response, I would say that most government-sponsored schemes of this nature carry anomalies. It was recently revealed that a substantial number of beneficiaries of the Help to Buy scheme could have afforded a property without this vehicle – and that 4 per cent of those who were given financial help earned salaries in excess of £100,000 per annum.

Regardless, the government insists that Help to Buy is good for buyers, especially first-timers, and for increasing housing stock. So if justification exists for Help to Buy for those at the bottom of the property ladder, why not “Help to Downsize” for those who would like to step down a few rungs?

Another good case for downsizing has just emerged with Labour’s threat to abolish IHT and replace it with something even worse – a lifetime allowance on capital assets (property, shares, savings) capped at just £125,000. Any gifts above that would be treated as income and taxed annually – negating the benefits of the seven-year rule under the current IHT. So releasing equity through downsizing will give folk the opportunity to spend and gift their money before Messrs Corbyn and McDonnell get their hands on it.

The stated purpose is to spread the benefits of “unearned income” arising out of the housing boom but this argument seems rather weak. I have no idea what Ian Rankin’s views on inheritance taxation are but I do know there are many others in Scotland who, to varying degrees, have similar backgrounds – raised in a council house who through sheer effort (and without any inherited wealth) amassed the sort of assets which Labour now covets. Should they not be permitted to pass on their wealth to whoever they wish without the state grabbing a substantial and unjustified share?