Increased amounts of inheritance flowing to Millenials to further ease affordability of UK Property
Updated: May 29, 2019
Following last week’s post on how inflation (and wage growth) is seldom recognised in the media as contributors to the affordability of UK property, I thought it worth noting also that increased amounts of inheritance flowing to younger generations is on the rise and will likely contribute further to the ease with which they will be able to afford a home of their own.
Some Key Stats (www.gov.uk/inheritance-tax):
- In 2015-16, 4.2% of UK deaths were liable to IHT (Government stats are accurate up to 2 full financial years prior due to delays in estate valuations)
- IHT receipts totalled £5.2bn in 2017-18; an increase of 8% (£388m) compared to 2016-17 and has been increasing since 2010-11. There was a 22% increase in receipts from 2014-15 to 2015-16. On average, IHT receipts have increased by 10% year-on-year since 2009-10
- Net capital value of estates (i.e. the sum of all assets minus the sum of all expenses, including funeral expenses) since 2009-10 has increased by £17bn to £79bn in 2015-16. Around 54% of this increase is in residential property
- The total number of liable estates has increased every year since 2009-10
IHT receipts and proportion of UK deaths liable to IHT
A report published in April 2017 by Royal London estimates some £400bn presently tied up in property owned by people aged 65 to 85 will be handed down to children and grandchildren, which is equivalent to New Zealand and Qatar’s combined GDP’s (IMF 2018).
In addition to this growing flow of inheritance, the government in 2017 introduced a new allowance that applies to property passed to direct descendants on death. This means that individuals have an additional IHT allowance on top of the £325,000 nil-rate band and the effect has not yet filtered into the HMRC data. The new band will reduce the amount of tax Britons pay, meaning more left over to pass down to the next generation(s).
The residence nil-rate band is currently set at £100,000 and will rise to £175,000 by 2020-21, meaning that from April 2020, a couple will be able to pass on an estate worth £1m tax free. Calculated as £325,000 plus £175,000 per parent. According to the Office for Budget Responsibility, the introduction of the nil-rate band will reduce IHT receipts by about £200m in 2017-18 and around £1.5bn in 2020-21.
Regional Breakdown: Number of estates and total tax due by region by year
London and the South East are where property values are highest on average and where the younger generation have found it hardest to purchase a property of their own without government assistance (Help To Buy) or financial assistance from family (The Bank of Mum and Dad).
The above graph shows that in 2015-16, 51% of the total IHT liability was concentrated in these two regions alone with the average taxpayer in London having a liability of £223,000 per estate.
I continue to make the case, therefore, that in addition to increasing wage growth, inflation and a stagnant property market coupled with the enormous flow of capital tied up in residential property, the younger generation will find their ability to afford their own home in the UK increasingly less difficult. It poses the question: why is the world so pessimistic about the next generation’s prospects of house ownership when the real figures shown above suggest a different outcome?