How another Labour inheritance tax raid could crush the property market

Telegraph

11 hours ago

Britain's fragile property market is all but propped up by the Bank of Mum and Dad – a lifeline that the Government could be about to rip away.
A rumoured new inheritance tax grab by Labour could upend the home-buying dreams of a generation and tank house prices, experts have told The Telegraph.
Under proposals reportedly being considered by Chancellor Rachel Reeves, the Government may bring in a lifetime cap on the value of gifts that someone can pass on tax-free before they die.
This would mean that any large sums handed over decades before death – such as a contribution towards a child's property deposit – would count as part of an estate for inheritance tax purposes, eroding a large part of the allure of giving such a gift.
Nicholas Mendes, of mortgage broker John Charcol, said restrictions on tax-free gifts would hit house prices and cause fewer people to buy.
Should Labour's proposed lifetime cap on tax-free gifts come to pass, it would likely lead to a 'reduction in parental assistance', he said. This would mean 'fewer buyers entering the market, which in turn would slow transaction volumes and dampen price growth at the lower end of the market'.
More than half (52pc) of first-time buyers rely on support from parents to get on the housing ladder, according to estate agency Savills.
Last year, gifts and loans from parents totalled £9.6bn, with nearly 173,500 first-time buyers receiving an average of £55,572 from the Bank of Mum and Dad, the estate agent said.
Any curtailing of this amount would have a big effect on the property market – not just on first-time buyers, but all the way up the chain.
Roarie Scarisbrick, of buying agent Property Vision, said that any changes to gifts would be disastrous for an already sluggish property market.
'You've got people moving up and down the ladder all the time, and each rung depends on the others,' he said. 'The problem over the last few years is that taxes, like stamp duty, have really clogged up the chain.'
First-time buyers were previously exempt from stamp duty on properties worth up to £425,000. Since the rules changed in April, the tax owed on that transaction would be £6,250.
Anything that causes 'congestion in the chain', Mr Scarisbrick said, including a slowdown in first-time buyers, has a knock-on effect for families looking to move.
Derailing plans
Currently, parents can pass as much money as they want to their children without incurring inheritance tax, provided it changes hands at least seven years before death. Any assets over the £325,000 threshold given between seven and three years before death are taxed at a so-called 'taper rate' of between 8pc and 32pc – and at the full 40pc rate in the last three years.
Taxing gifts made before death would hit homebuyers hardest in London and the South East, said Aneisha Beveridge, of estate agency Hamptons.
She said: 'In this environment, financial support from family has become a crucial stepping stone. It's in these areas where buyers typically receive larger gifts, so any move to cap lifetime tax-free transfers could disproportionately affect those trying to buy in high-cost regions.'
The average first-time buyer deposit in London is £137,863, according to Savills, compared to £68,631 in the South East and £26,858 in the North East.
Higher incomes in the capital have not led to higher levels of homeownership, as deposit requirements continue to outpace salaries, said Lucian Cook, of Savills.
'Here, the average deposit as a percentage of income is 138pc,' he said. 'This is far beyond what most average buyers can save for independently, meaning that it is incredibly difficult for buyers to get a foot on to the ladder without receiving help.'
Richard Cook, of wealth manager Rathbones, said that support from the Bank of Mum and Dad 'often makes the difference between dream and reality' for young people buying a home. He added that changes to rules around gifts would potentially derail the plans of would-be buyers.
He said: 'Such changes would likely hit the Bank of Grandma and Grandpa hardest, as many grandparents step in to give their loved ones a much-needed boost – and could find their generosity entangled in new layers of complexity when it comes to estate planning.'
Adrian Anderson, of mortgage broker Adrian Harris, said the proposed changes would also hit 'next-time buyers', who rely on their parents' support for their 'large forever home' rather than their first property.
'I arranged a mortgage for a next-time buyer recently, and the parents gifted circa £300,000,' he said.
A 'vacuum' of information
Any changes to rules for giving gifts could also have unintended consequences of initially pushing up prices. Mr Mendes added that speculation around tax grabs typically spur a flurry in house-buying activity, as buyers rush to complete purchases before changes are made.
He said: 'This could result in a temporary surge in first-time buyer demand, which may push prices higher for a short period.'
Conversely, bosses at Savills said a 'vacuum' of information on inheritance tax changes from the Government was forcing prospective house buyers to hold fire on purchases.
Simon Shaw, Savills' finance chief, said that 'in the interim period, it creates a level of uncertainty in the residential market particularly. It's classic uncertainty. People fill the vacuum with their own fears about what might happen'.
A Treasury spokesman said: 'As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy, which is our focus.
'Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms, which are expected to grow the economy by £6.8bn and cut borrowing by £3.4bn.
'We are committed to keeping taxes for working people as low as possible, which is why at last October's Budget, we protected working people's payslips and kept our promise not to raise the basic, higher or additional rates of income tax, employee National Insurance, or VAT.'