Inter generational wealth

 

It can’t be right that house prices go up in value more than earned income on an annual basis and that is tax free, or that the overall taxation advantages of owning your own property are – well, considerable.

Complete tax free growth during your lifetime and on sale and for most on death.

It can’t be right that those who rent and also pay taxes don’t get the same tax breaks.

But it gets worse for the non property owning taxpayer.

  • Help to buy is a home buyers subsidy there is no equivalent for those renting.
  • No VAT on new property sales is a tax break to builders and buyers and a cost to you the non property owning taxpayer
  • There is no capital gains tax on the growth in value of your home if you own
  • Even on death homeowners still win with an additional £150,000 tax free allowance (Inheritance Tax relief on main residence)
  • Selling off part of a garden is also exempt from income and capital gains tax

It can’t be right that today’s working youngsters – those under forty are forced to make contributions to the pension scheme of others – knowing that they will not benefit from a similar pension. Example of this, the State Pension, today’s National Insurance contributions pay the pensions of those currently retired. Like a PONZI scheme

There is only a limited fund in Government savings if any at all.

Many of the pensioners retiring and retired have enjoyed or will enjoy good final salary pension schemes – these have all but disappeared.

State employees enjoy a taxpayer supported Final Salary pension scheme, the liability of these schemes falls on future tax payers. Government is refusing to fund state pensions with a reserve of money – a proper pension pot. Yet it forces you to make contributions to your own pension pot – by law. You have no control over charges and limited control over the investments. It’s called auto enrolment.

It can’t be right that Student Loans are a £105bn liability that is now placed back on individual students in the form of loans. Those completing their further education before 1998 would have no loans to repay. The whole further education system was funded by taxpayers until then – it meant that the cost of a degree was little if anything.

[http://researchbriefings.files.parliament.uk/documents/SN01079/SN01079.pdf]

That means most of the current Ministers of Parliament would have secured a very low cost further education, along with all the people you meet over forty years of age that have a degree.

How does it feel having to repay some £50k of debt that many of the people you’ll be working with didn’t have that to find?

  • It can’t be right that you’ll have to fund the over forties pensions and additionally fund those working in Government departments well into retirement and cover your own education costs, along with being forced to make pension contributions – whilst not being able to afford your own home.
  • It can’t be right that it will be even harder to own your own home especially as your Student Loan restricts the amount you can borrow and in London – house prices are 14.5x salary across the UK it’s around eight times and in 2009 it was around five times (ish)
  • It can’t be fair for unearned house price profits to be handed down tax free to those few who made a decision to buy a property in the 90’s or before
  • It can’t be fair that under the Right to buy – under this scheme some fifty thousand – taxpayer funded properties were sold to tenants- at up to a seventy percent discount in the last nine years. When those under forty will have little or no access to an instant asset, like the right to buy
  • It can’t be right that those borrowers looking to invest in a property via BTL have a more generous lending criteria than those looking to fund a purchase as a main or only home

So how do we balance that up, how do we try and equalise all of that?

The government would have you believe that all we need to do is roll over and let things continue as they have done for the past 50 years, reality is that’s no longer working for most.

Evidence is all around – less than half of the population now own a property, prices in London are around 14.5 times income. They have never been so high. Importantly in places like Croydon there are hundreds of ovepriced flats available for sale, mothballed waiting for the market to return.

Most of these will be left empty, no one knows for how long.

For many years house prices sat around 4 to 5 times income, and at one time tax relief was allowed on interest payments. And then central government made a policy of selling off council homes under the right to buy and not building enough houses to cope with the population growth that it encouraged.

Population. It’s all very simple to blame it on the immigrants, but that is not the answer. If Government wants to grow a population by several million in a very short period of time it needs to make sure that infrastructure is put in place or we end up with a bubble, and a shortage. Ring any bells.

Good examples of this – shortages of GP’s and school places and a lack of housing. I guess I’ll continue that in another post.

There are several ways we can start to adjust the system. Government could allow any rental payment to be offset against income tax. Yep that’s right tax relief on renting. When you think that homeowners benefit from unlimited tax-free growth in the capital values this would be one way of balancing the whole thing up.

Sure many people would agree that there is unfairness in the system and this unfairness needs to be addressed however no Conservative or Labour government has so far wanted to deal with it. That is a potential problem and a problem that needs to be addressed by the taxation system at some point in the future, the unfairness doesn’t make sense. You are all told – the under thirties, under forties are important on one hand – then shafted by the system that has been created.

The status quo as it is cannot continue. I’m not sure why that conversation is ignored, I think Labour accept it as a hot potato and Conservatives are completely in support of their current policy – I have some of that in writing.

They seem to be happy to introduce taxation on spending and leave capital to be treated very fairly by the tax system, this of course benefits the half that own assets like a home and directly disadvantages those who rent.

If we consider carefully what happens in places like the United States of America where capital gains tax relief on main residences is allowed at a fixed figure. Sure you can benefit from tax-free growth from your property but the amount is limited as an allowance. The problem is as I see it, the UK government, successive UK governments have used the increase in property values as a feel good factor. Basically, Governments can do what they like provided house prices keep going up.

We could look at it from another perspective.

We could start to offer tax relief for those people purchasing, provided they are coming from rented accommodation, that’s even it up. The end sale could be taxed. They do it with pensions – tax relief currently costs £50bn per year.

We could immediately scrap right to buy, we could immediately scrap help to buy.

The answers it seems are unlimited the problem is inaction on behalf of our Government. It doesn’t seem to be that interested in fairness and balancing things up.

Pensions
If we look at those people that are currently drawing on a state pension, or a final salary company pension scheme we will find that they have been very well looked after by successive Governments and successive enhancements to pensions.

The final changes on this should have been the pensions triple lock which was introduced by the Conservative/ Lib-dem Government. This triple lock means that pensioners that are currently drawing on benefits will continue to be looked after for a very long time. This triple-lock actually paid for by current taxpayers. Many of whom will be under 40 and are unlikely to benefit from these enhancements. In fact those of you that are under 40 are likely to to see your pension benefits from the state reduced quite substantially. This is not an acceptable way to spread wealth.

It would seem that relying on any form of state benefit means that you will be substantially worse off than your parents and most certainly your grandparents. Obviously no intergenerational sharing going on there.

We also face a situation where your parents and grandparents had the option of well paid jobs that secured an above minimum wage income and also long-term security. What used to be known as jobs for life. These no longer exist for the under 40’s – these people are also being asked to contribute substantially more via taxation than their grandparents or parents.

Taxation has been increasing in recent years, despite the level of government borrowing which is also going up – we should question where the money is going? Importantly, any proposed Labour government is also saying that it will increase taxation I do hope it thinks very carefully about that.

Answers to that on a postcard please.

It does seem a bit of a mess that Government is increasing it’s borrowing and increasing taxation at the same time, yet doesn’t want to answer awkward questions about where that money is being spent. I can assure you that it’s not going to provide pensions for the under 40s.

Let me give you some answers to this, some answers that so far no political party wants to address. The Conservatives – want the current system to continue. They think it’s working. Labour wants to increase taxation – to spread the wealth, yet make no plans for equalisation of the system to treat all taxpayers more fairly. For example, it could focus on getting the environment right and tax accordingly. Or it could introduce taxation on main residences. both of which will introduce some fairness into the system but will make them unelectable.

There is a need for.

Fairness in the taxation system.

Fairness in relation to pensions.

Fairness in relation to capital allowances particularly those that relate to property.

Capital taxes favour those that have capital and these are also supported by tax-free growth on houses and inheritance tax breaks for those that have  one to pass on at death.  There are no such tax breaks given to the 50% of the population that is currently renting.

Suggestion here would be to limit capital allowances on a main residence. It cannot be right that in most market conditions you make more money from the growth and value of your property than you do from working, but only if you own one.

We also need to balance up the pension system, it does seem incredibly unfair that the liability being caused by today’s pension scheme members are going to be funded by future taxpayers. Successive Governments have so far failed to address all of these things and that needs to change. Sure there are some unpalatable things to consider, but the truth is the truth.

It’s the same as the alcoholic waking up to the fact that they can no longer have a drink, it may be incredibly hard – but it has to be done.

Comments welcome on this one.

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