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Weekend reading: The price of high house prices

Weekend reading

Good reads from around the Web.

Every now and then a reader asks me to update one of the older articles on property and house prices here on Monevator.

I usually say I plan to — and usually I do plan to.

But whenever I knuckle down to it, the whole subject is too depressing.

Obviously a bubble?

Quite often I meet young value-minded investors for whom London property in particular is clearly in a crazy bubble.

They are appalled that I don’t agree that an imminent crash is a slam dunk certainty.

I say that I might if I was standing in their shoes. My problem is London house prices first looked to me like a crazy bubble in 2004.

Besides, far more often I meet people who say “you can’t go wrong with London property”, including members of my own friends and family.

One is weighing up leaving London, or else using the six-figure deposit she’s saved hard over her ten years in work — together with the highest mortgage she can get with her (latterly) £70,000 a year job — to buy a two-bed flat in Zone 3 in the East End.


But will it ever end?

Everything in me that’s a value investor says yes — including my awareness that my reticence to voice that London property is in bubble territory, after being wrong for (most of) the past ten years, is probably in itself a sign of a bubble.

But the animal in me is fearful. It sniffs the air, sulks, and returns to its den.

Numbers of the beast

Some useful stats on all this in The Telegraph today, in an article that asks if the average working life is no longer enough to pay for a house:

Official figures suggest there are about 400,000 over-65s still with mortgages, a figure that is growing by about 10% per year. And as Telegraph Money reported recently, European figures show that one in five of British 65 to 69-year-olds is still working, a far higher proportion than in Germany, France, Ireland, Italy or Spain.

Why? To pay off their mortgage, of course, or scrape a bit more towards a pension, or both.

The article is a rarity, in that it combines the plight of older home almost-owners with that of the young.

It also gives lie to the nonsense that it has always been this hard for the latter:

The ratio between property prices and wages has shifted so enormously that house buying today is as difficult for buyers with two wages as it was 35 years ago for a single borrower on just their own income.

Today’s first-time buyer – putting down an average £30,000 – would need to borrow 3.4 times a single wage, compared with a borrower 35 years ago needing 1.4 times his wage, to purchase the equivalent property.

As for London:

Say you’re a hugely lucky buyer with a 20% deposit (£100,000) to put down.

Assume the average rate you’ll pay over 25 years is 5% – a generous assumption, given rates over the past 25 years have averaged higher.

You’d still pay around £2,340 per month and just over £700,000 in total.

It’s generally said mortgage costs shouldn’t exceed half of a household’s after-tax income. But for £2,340 to equate to less than one half of post-tax income, an individual would have to earn £87,000 in today’s tax regime (£4,800 per month after tax).

And that’s the average property in the capital – not the comfortable family home that an averagely paid accountant or doctor might have afforded in London in the Eighties, but which today would cost £2m or £3m.

Generation wars revisited

The most depressing takeaway from all this?

The suggestion that 60-somethings with mortgages should use the new pension freedoms to release cash to pay off their debts.

It’s probably good advice, as no doubt the poorer among them will eventually be able to pass means-tests for pension top-ups or similar, which I’d bet will look at incomes and investments, but not at personal places of residence.1

But as a sustainable solution for the nation, I think this is ridiculous.

The correct thing for older people living in big houses they haven’t paid off to do is to sell-up, move somewhere smaller, and put anything leftover into their pension.

And to free up a house for a young family at the same time.

I once had a bitter, bitter argument in an online forum that I eventually had to leave about this sort of thing, when I said I had no sympathy for 65-year olds rattling around in 5-bed houses who were struggling to meet their heating and council tax bills.

Sell! Move!

Apparently I was utterly uncaring and heartless. Because I saw a bigger picture of need, not a micro-hardship.

Well that was a decade ago, and things have only gotten more crazy.

I’ve discovered in unrelated discussions that even most Monevator readers disagree with me that inheritance tax should be, say, 95% over the first £100,000.2

So I suspect that equally few among the phew-we-made-it middle-classes will be on my side when it comes to my call for mass-downsizing.

An Englishman or woman’s home is a castle. And once they’re in it, they’re jolly well entitled to pull up the drawbridge, right?

Even if they can’t afford it, and even if it is turning the next generation into peasants.

I so wish the whole caboodle would crash, before it gets even uglier.

But will it?

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: Are you an active investor who is interested in UK small cap shares? Then you might want to bag tickets for Mello 2014. This brand new conference is being put together by a redoubtable private investor, and the speaker list already looks impressive. I’m optimistic the dodgier AIM companies are going to be weeded out from getting involved, too.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.3

Passive investing

  • Munger, Harvard, and the Calpers hedge fund exit – Market Watch
  • Passive fund rankings under scrutiny [Search result]FT
  • How not to worry about a fund’s performance – WSJ [feat. Mike]

Active investing

  • A global map of the cheapest stock markets (from peak) – Telegraph
  • Thinking long-term could be your edge – Forbes
  • Apparently the super-rich are buying more gold bars – Telegraph
  • Put your money where your mouth is [Search result]John Lee/FT
  • What one manager is buying to hit his 6% income target – Telegraph

Other stuff worth reading

  • ISA transfer times down to as low as six days, say brokers – Telegraph
  • Devolution fear for financial services [Search result]FT
  • Changes to the intestacy laws on dying without a will – Guardian
  • Now is a tough time to retire [US but relevant]F.A.
  • The essential guide to big home improvements – Guardian
  • The unbearable sadness of the Welsh valley towns – BBC

Book of the week: I had coffee with Lars Kroijer this week. While he didn’t reveal any numbers, I got the strong impression that writing a book on passive investing has not proved 1/100th as lucrative as running a hedge fund. No surprise, but if just 5,000 of his readers save £10,000 over their investing lifetimes by reading his book and going passive versus using expensive active funds, that’s £50 million of extra money in his book customers’ collective retirement accounts. I’d call that a purer sort of Alpha. (It’s why we write Monevator, too).

Like these links? Subscribe to get them every week!

  1. I am speculating about the future here, not talking about the specifics now or yesterday. []
  2. Whereas incomes I’d tax at a flat rate of perhaps 25%, after raising the personal allowance for lower earners. Earn more while you work, contribute, start businesses or invest. Get much much less because dad died. []
  3. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.” []

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{ 67 comments… add one }
  • 1 Grand September 20, 2014, 1:59 pm

    Your article this saturday has made me feel as grey as the grey skies over head. I am an under 30’s living with parents in one of those homes that is now has an asking price of mill, it’s really daunting that I may not be able to afford a mortgage to buy a home on the street I’ve lived on most my life. Leave where you live and love behind to go some place else which is affordable (in my case out of london) or spend all day working trying to make your way up the income ladder (at the same time not being able to enjoy the city you live in as your all ways working to bring in an income for that deposit you’ve been saving for which keeps on needing to get bigger and bigger).

    What ever do you do ?

    Thank’s TI – at least I know I’ve got my plan for early retirement sorted that’s one thing less to worry about.

  • 2 ermine September 20, 2014, 2:48 pm

    @Grand I had the same problem over a quarter of a century ago. I couldn’t afford to stay in the city of my birth and left London. The capital really is a strange place…

    > even most Monevator readers disagree with me that inheritance tax should be, say, 95% over the first £100,000

    I hope and pray this does come to pass, before the tax is enforced in a couple of generations’ time by people with pickaxe-handles. Over a third of the land in England is unregistered – that is because it has been in the same 1200 families for hundreds of years, the concentration is even worse in Scotland. It’s a part of our housing problem, it leads to perverse incentives in farming and land use generally on a small island.

    Low inheritance taxes are okay where it’s possible for most to earn enough to establish themselves in a working life – enough to get the resources to fund a roof over your head, have a couple of kids and a modest pension. That’s less and less possible now – the modern economy needs a smaller part of the ability spectrum, focused on the top end.

    I have no problem with increasing income inequality, but if it leads to a new dynastic feudal system because dumb kids inherit previous generations wealth without creating wealth themselves, it’s an affront in a nominally democratic country.

    As for the mortgaged retirees in the Telegraph’s story – one of the things that should improve with age is wisdom and if you are interest only at 55 with no way of paying the capital then you have ignored an increasingly pressing problem for decades. You have less excuse than the young’uns overpaying because at least they don’t have the experience…

    > My problem is London house prices first looked to me like a crazy bubble in 2004.

    That’s bad, but you really don’t want to try making the mistake the other way round. Freezing in a house because you can’t afford to heat it, you owe more than the mortgage despite starting with a 20% deposit while you see the repo notices slapped on neighbours either side, interest rates go into double figures and you hope the cutbacks at work don’t take you out is no fun.

    The internet has little record of what happened with property in the UK in the early 1990s, because the WWW started in ’93/94. But it happened, and a lot of people got hurt by property in the UK – millions. That is a generation ago now. Most libraries have newspaper archives going back to the 1980s. Anybody thinking of buying a house now owes it to themselves to do a search on negative equity and read some of those reports from the early 1990s, and ask themselves if it really is true that it’s all different now, just as the Telegraph is telling us that working lifetime isn’t long enough to buy a house…

  • 3 Neverland September 20, 2014, 2:51 pm

    It’s young people’s own fault they are ignored politically

    They are about half as likely to vote as their grandparents

  • 4 Jed September 20, 2014, 2:59 pm

    Is keep hearing that it is really difficult for first time buyers today to get on the ladder. I read its this and that ratios, well i bought my first house in the 1992 (two bed semi) for £41500. I put down a deposit of £5500 and borrowed £36000 on a special first time buyers rate of 13% ( yep the normal rate was something in the region of 16%) The monthly cost was £406 for 25 year repayment mortgage.
    The same house is on the market today for £115000 if somebody was buying it today and they put down a deposit of £10000 and borrowed £105000 using a Halifax mortgage rate of 4.94% (fixed for two years) the monthly repayment would be £610 for 25 year repayment mortgage.
    My monthly mortgage of £406 in 1991, if adjusted for inflation would be £806 in todays money. Its not easy being a first time buyer not now and not then.

  • 5 Willem de Leeuw September 20, 2014, 3:29 pm

    “The most depressing takeaway from all this? The suggestion that 60-somethings with mortgages should use the new pension freedoms to release cash to pay off their debts.”

    I didn’t think it was unusual for people in England to pay down their mortgages with their 25% pension lump sums, but perhaps the point here is that this might no longer be enough?

    “95% over the first £100,000” That’s crazy. At this rate on that amount a great many people will risk breaking the law to hide their post-tax savings (and income will be taxed at how much?). When tax on savings’ interest and the top rate on income tax was, IIRC, ca.60% the government of the Netherlands was surprised to discover that a great many otherwise law abiding citizens had opened accounts in Switzerland and weren’t declaring the income. Law enforcement is apparently better now but super taxes don’t work. I’ve moved once to avoid 52% income tax and a stupid wealth tax and I’d definitely consider moving again for a 95% inheritance tax.

  • 6 The Investor September 20, 2014, 3:45 pm

    @Willem — Well as I say in the footnote, income taxes would be much lower in my world. But I am not surprised you disagree, as nearly everyone does. 🙂 People would apparently rather tax workers and investors, than the unearned wealth of the genetically super lucky! (Most of whom will already have had the tremendous benefits and head start of growing up in wealthy households, great education, peer support etc)

    Sure, let’s tax the man or woman who starts with nothing and does it all for themselves instead!

    I can only presume the masses equate passing on wealth as a cheat against death. I’ve some bad news…

    I fully agree it is hard to police though. Maybe easier nowadays though, with the Draconian anti-laundering checks etc?

  • 7 Faustus September 20, 2014, 4:56 pm

    Great post! As someone of a similar age in a similar situation, wholly in agreement with you about the need for higher inheritance taxes as well as the lack of sympathy for greybeards rattling round in empty houses and moaning about costs.

    Almost anyone who was lucky enough to buy property before 2000 in southern Britain is now sitting on an unearned windfall of hundreds of thousands of pounds, financed increasingly by the younger generations, and resulting in one of the most extraordinary transfers of wealth from young to old in UK economic history. The FT has recently published a number of interesting articles on this phenomenon, so its not just you TI who is concerned (e.g. http://www.ft.com/cms/s/0/53a4b2fa-0b69-11e4-9e55-00144feabdc0.html ).

    Unless one believes that increasing inequality is healthy, there are strong arguments in favour of reducing taxation on earnings and increasing it on land and capital (as well as on transfers of one’s wealth after one is dead). Having said that, I suspect private finance forums are well populated by the wealthy and those who have invested significant effort in increasing that wealth, so it’s not surprising such views will be unpopular!

    In terms of the future it is hard to see how property in England is going to produce above-average returns over the next couple of decades. Interest rates can only go one way, and there is only so much taxpayer assistance (e.g. Cameron’s mendacious ‘help-to-buy’ scheme) that can be thrown at this inflated asset class. Having spent some time in Germany, where accommodation is both cheaper and of a higher standard than here, I wonder how much better would our standard of living and economy be if we as a nation began to understand that housing is a utility and not a tool for speculation?

  • 8 Ben September 20, 2014, 5:39 pm

    Just leave the UK if you are young and can command a 70K salary in London. Living standards are dropping, pumping house prices is just forestalling the inevitable.

    “The ratio between property prices and wages has shifted so enormously that house buying today is as difficult for buyers with two wages as it was 35 years ago for a single borrower on just their own income.”

    That’s because banks were allowed to move from lending 3 times single income to 5 times “household” income. The banks need to be pruned.

    Totally agree regarding inheritance tax, but most upper-middle class brits want anything but a meritocracy.

    Not going to get better in 15 years minimum. Get out unless you make your money as a rentier shafting others.

  • 9 ermine September 20, 2014, 5:42 pm

    @Faustus I was ‘lucky’ enough to buy property in 1989, I don’t know if East Anglia counts as southern Britain these days 😉

    It is the single worst personal finance action I have ever made in my life. I got hammered by negative equity. Yes, the next house I bought in 1999 has appreciated, but the hit I ate on that first house still shows. Not everybody made out like bandits, and I purchased that house as a single man with similar P/E multiples and a 20% deposit to what a a couple would face now. That it didn’t end well may be something for people to reflect on.

    So I for one repudiate your charge of “sitting on an unearned windfall of hundreds of thousands of pounds, financed increasingly by the younger generations, and resulting in one of the most extraordinary transfers of wealth from young to old in UK economic history”. I have just typed the original purchase price into the bank of England inflation calculator – if I add the money I paid into the black hole of negative equity I am about evens or slightly up by about 20k in today’s money. And I was one of the lucky ones, I didn’t get repossessed or lose my job.

    I do feel your pain on housing. I was once that young person 😉 And I absolutely agree with you here

    I wonder how much better would our standard of living and economy be if we as a nation began to understand that housing is a utility and not a tool for speculation?

    It would be immeasurably better. But that was the Faustian Pact we made when Right to Buy started – it pole-axed housebuilding in the UK. Just like the NINJA loans in the US, it enabled people who couldn’t afford to buy houses to buy them rather than rent. Unlike in the US, Right to Buy gave council tenants free money from other taxpayers to buy at below market rates, and forbade councils to build replacements for some reason. Just like the various forms of government intervention now – help to buy etc – free money to help people who can’t afford to buy do so, jacking prices and rents up all round.

  • 10 Jon September 20, 2014, 5:46 pm

    And we haven,t even discussed the BTL brigade.

  • 11 Ben September 20, 2014, 7:07 pm

    We wouldn’t be better off by much. The UK is printing via housing to avoid collapse. Had we tried to address our issues and compete perhaps we’d have made it. We will never know. Too late now, it’s nailed on. When the US raises rates the UK is toast.

  • 12 The Investor September 20, 2014, 7:22 pm

    @ermine — Love these long contributions and history, please keep it up! 🙂 But I do have to remind you that we have been through the argument that people have not made money in property, based on your experiences before. I for one was unconvinced. It may be that you were part of a particular cohort who bought in the very few months of a particular year in the last 25 when it did not do well, but that hardly repudiates the boom! 🙂 I personally know dozens of people in their early 40s who are several hundred thousand pounds better off from just the past 25 years alone. We can debate the rights and wrongs – and I do think there are two sides – but surely we don’t have to debate whether the boom happened! 🙂

    @Jon — Call me contrarian but I am not as worried about BTL as I know many frustrated buyers are. I don’t say it is the best outcome, or that they do not have advantages, but at the end of the day at least people are living in these houses and some needs are being met. However I would tax second homes/empty homes to oblivion.

  • 13 dearieme September 20, 2014, 9:09 pm

    “Leave where you live and love behind”: now all you have to tell us is why Londoners should be exempt from the experiences of people from all over the rest of the country.

  • 14 Grand September 20, 2014, 9:52 pm

    @dearieme I don’t think it should be an experience for Londoners or for people from all over the rest of the country.

  • 15 Dividend Mantra September 20, 2014, 11:05 pm


    Thanks for including me in your weekend reading!

    Hope you guys are enjoying the fall weather over there. 🙂

    Have a great weekend.

    Best wishes!

  • 16 oldthinker September 21, 2014, 1:54 am

    IHT at 95% could easily be avoided by means of potentially exempt transfer. I would certainly give my house to my son straight away (and then pay market rent to him to avoid being caught by the reservation of benefit rule). Losing control over an asset is not ideal, but the prospect of 95% being taken by the taxman is so much worse that PET clearly wins.

  • 17 oldthinker September 21, 2014, 2:21 am

    > But that was the Faustian Pact we made when Right to Buy started … Just like the various forms of government intervention now – help to buy etc

    I reckon that Force to Buy will be next.

  • 18 The Investor September 21, 2014, 9:45 am

    @oldthinker — Clearly various rules would need to be changed and tightened in my (likely impossible, agreed) scenario to make such transfers less straightforward.

    But yes, the fact that the very wealthy would more easily get around them is the big argument against ultra high IHT.

  • 19 The Investor September 21, 2014, 10:52 am

    My mother, who like nearly everyone disagrees with me on this, has just suggested the word “tax” might be the problem. They don’t see the government as the best / deserving recipient of their money.

    I certainly can see that POV. For my part I presume I’ll give most of my money away to things I believe in. So to be clear, a white list of legitimate established charities (I.e. Not fronts for the heirs’ trust funds!) would be entirely exempt from all IHT and transfer taxes.

    I don’t think that would sway many though.

    Partly I think it’s clearly and animal/offspring instinct, and partly I’m convinced it’s a similar motivation to dead Pharoahs and pyramids.

  • 20 Nyul September 21, 2014, 12:43 pm

    I’m a BTL’er with a fairly large portfolio and I often think about where this is all headed. I’m now fully committed to index funds, so I’m slowly moving away from BTL a bit – the risks (when using mortgages) are huge, and the management overhead is hard to avoid, even with agents – they won’t deal with evictions, or block management issues with a freeholder for example.

    The argument goes that BTL investors take property away from first time buyers. I think there’s truth to that, though BTL does have a flip side – many house builders sell to BTL’ers, without them I suspect supply might be even lower – for the long term keeping supply up is important for everyone. Also, BTL has massively increased the supply of rental properties, which has certainly kept rents lower than they would be otherwise. First time buyers who cannot buy can at least rent at lower levels than they might otherwise – with the banks being so tight with rules on lending, many wouldn’t be able to buy even if prices weren’t so high in the South East. Although LSL always claim rents are up a lot, they look at NEW tenancies only – if you look at a cross section of all tenancies (as the ONS do) rents are rising below inflation, and I figure BTL is the cause of that. At some point BTL yields may become too low for investors, and that would make more available for first time buyers.

    My sense is house prices are not in a bubble except perhaps in central London. I figured once the economy start to recover there’d be a bump as buyers came back to the market. We also have low rates that make higher affordability ratios a bit less of an issue (though they are stretching limits now). I live in an outer zone of London and a decent 2bed house with parking and a garden within 5-10mins walk of a tube or overground station into central London is ~£350k. That’s certainly not cheap, but it is a good property in a good area, and rather below the “average” bandied about which is heavily warped by the central London pricing which is a different market altogether. Spacious and decent large studio flats are still under £200k in areas I know. Let’s not rely too much on that average, warped by Central.

    We should remember the statistician who drowned in a river that was, on average, one metre deep. I know landlords in parts of the UK where property values are still where they were in 2007, and rents have also been static. They, and homeowners in the same area, are in a horrendous position. London is like another planet.

    I marvel at the foolishness of policy making in housing. It is quite obvious I think that house prices and rents are high in London and the South East because demand is high – the only solutions are to reduce demand, increase utilisation, or increase supply. The coalition has done little of anything except asking landlords to not rent to illegal immigrants (encouraging the dodgy ones to not rent to anyone without a British passport), and Labour have their “control & cap” agenda which will certainly result in higher initial rents at the start of a tenancy, tightened repair budgets, and reduced supply for those coming into the rental market. Price caps increase risk, and that has to be compensated for. Since their announcement I’ve kept rents closer to average market rents and not let them slip far under as I’m preparing for caps and regulation. When caps are coming, all businesses act for self-preservation.

    What frustrates me is the failure of politicians to talk about WHERE they want to build their housing – the dirty secret until after the election? I also wish politicians would take sensible steps to increase quality of renting for tenants – massively higher penalties for landlords who break the law (with funds directed to EHO depts in councils to inspect far more properties), mandatory carbon monoxide alarms, mandatory five yearly electrical wiring inspections, mandatory fire detection, and perhaps a national register (not least to make it possible for the government to communicate and educate re obligations).

  • 21 dearieme September 21, 2014, 1:30 pm

    @Grand. ” I don’t think it should be an experience for Londoners or for people from all over the rest of the country.” We will all grow up being guaranteed a job of the sort we’d like just next door? Magic!

  • 22 oldthinker September 21, 2014, 1:39 pm

    > Partly I think it’s clearly and animal/offspring instinct

    Yes, absolutely. A lot of people are motivated to work hard by their desire to leave a legacy to their children. You are effectively proposing to remove this incentive on the basis that keeping it may remove the incentive for the next generation to work hard; this does not sound very logical to me.

    By the way, I will fully expect my son to work all his life even if I succeed in leaving him enough capital to live off comfortably: this is the way he has been brought up by his family and by the schools that he has attended. Hopefully, he will be less constrained by financial considerations in choosing his line of work than most people – my animal instinct stretches this far.

  • 23 ermine September 21, 2014, 1:54 pm

    @TI > So to be clear, a white list of legitimate established charities (I.e. Not fronts for the heirs’ trust funds!) would be entirely exempt from all IHT and transfer taxes.

    You will be pleased to hear this is already the case 🙂

  • 24 ermine September 21, 2014, 2:47 pm

    @oldthinker > I will fully expect my son to work all his life even if I succeed in leaving him enough capital to live off comfortably

    how odd. Surely the gift of manumission from wage slavery is one of the greatest financial gifts a parent can make, the whole work to live not live to work thing writ large 😉 It’s not actually mandatory to be a slob and watch the Jeremy Kyle show if you don’t do the 9 to 5, one presumes the excellence of the schooling and parenting will give your son the intellectual frameworks and personal integrity to pursue self-improvement rather than crass hedonism; Alain de Botton rather than Paris Hilton or the Ecclestone daughters.

    It was only when I was older that I understood what my mother meant saying that she gives gifts without let or hindrance because otherwise they become a means of control…

  • 25 agranny September 21, 2014, 3:45 pm

    Why do we need our money after we have died? IHT seems to me to be very sensible at whatever % and at whatever threshold. We can give it away before we die if we wish.
    Why do we need to own as opposed to renting a home? If private ownership were illegal and if we rented our homes from a local-government department would that be a better system?

  • 26 grey gym sock September 21, 2014, 4:27 pm

    i am very much in favour of IHT, because you need less money when you’re dead. if the aim of taxation is to raise sufficient revenue without making the tax payers suffer more than is necessary, then it would be a mistake to ignore this fact. (though i should say that the same principle also argues for a progressive tax on income – because the higher your income, the larger the percentage of it that you can do without with the same degree of privation.)

    however, if you want to raise more via IHT, the obvious place to start is by closing up the loopholes, not by reducing the exempt amount and increasing the rate. e.g. there is no sense in giving exemptions for agricultural land or AIM shares. there may be a case for some exemption for private businesses where the owner also runs the business, but it shouldn’t extend to completely hands-off investments.

    another issue is that, if you are rich enough, you can avoid IHT by changing your domicile. if you’re domiciled outside the UK, your UK assets will still be subject to IHT – assuming you own them directly. but not if they’re held in some offshore company/trust/etc. to my mind, this is more easily addressed by a small annual wealth tax on UK assets than by IHT. so i’d rather introduce an annual wealth tax than have much higher IHT rates.

    (it also seems a bit unfair to tax wealthy families more heavily if they die more frequently. and it gives them an way to reduce IHT by passing wealth down skipping a generation or 2. an annual wealth tax is arguably fairer.)

  • 27 grey gym sock September 21, 2014, 4:30 pm

    and another IHT loophole/exemption that could be tightened up is on lifetime transfers more than 7 years before death.

  • 28 oldthinker September 21, 2014, 4:46 pm


    Self-improvement is not enough as far as I am concerned – I want my son to actually do something useful (while not having to enter into the wage slavery mentioned by you). You have to make allowance for the act that I am a foreigner; aversion to work as such is still alien to me :-).

  • 29 magneto September 21, 2014, 4:59 pm

    There was a useful link in another earlier posting re real house prices. Can it be accesed up to date?

    From my own records, average UK house prices and the average to RPI adjusted has drifted as follows:-

    Dec 1986 : £42,262 : 30% below average
    Dec 1988 : £65,442 : about average
    Dec 1995 : £61,554 : 33% below average
    Dec 2007 : £197,244 : 54% above average
    Dec 2011 : £160,063 : 10% above average
    Dec 2013 : £173,467 : 13% above average

    Figures taken from Halifax House Price Index and RPI.
    Real house prices should rise over time as the housing stock improves, unless house sizes are decreasing.
    The above data does not point to a current bubble in RPI adjusted terms for the average UK house.

    However :-
    Wages have not recently been increasing in line with inflation.
    London and a few other cities are running hot.

  • 30 oldthinker September 21, 2014, 5:01 pm

    grey gym sock

    > another IHT loophole/exemption that could be tightened up is on lifetime transfers more than 7 years before death.

    Would 70 years be appropriate in your view? Let us tax each other on anything we wish to give to anybody (barring registered charities) at any time at all, on the basis that we are all eventually going to die anyway.

  • 31 oldthinker September 21, 2014, 5:06 pm


    > Why do we need to own as opposed to renting a home? If private ownership were illegal and if we rented our homes from a local-government department would that be a better system?

    While we are at it, let us also ban private ownership of the means of production and be done with it. We all know how such a system is called, and no, it is not a better system – been there, done that.

  • 32 magneto September 21, 2014, 5:14 pm

    On the IHT topic, some people have disabled offsprings for whom it is necessary to set up a trust (for items such as accomomdation i.e. the very housing we are talking about). Under those circumstances IHT can be seen as an unreasonable tax on a lifetime savings that was intended to support those offsprings.
    Many countries do not employ IHT at all.
    Sensible balance is needed.

  • 33 grey gym sock September 21, 2014, 5:26 pm

    oldthinker, the obvious approach would be to add up all gifts which are currently PETs, and knock that amount off the available IHT exemption at death. lifetime gifts wouldn’t be taxed at the time they’re made unless you reached £325k in lifetime gifts. i’m also not suggesting removing the other exemptions for lifetime gifts (e.g. the £3k per year exemption).

    magneto, i think there are already some exemptions re trusts set up for the benefit of disabled children. which IMHO is fair enough.

  • 34 oldthinker September 21, 2014, 7:13 pm

    @grey gym sock

    I was being sarcastic when I suggested a 70 years’ term for PET, but your apparently serious proposal goes beyond that, stretching the term to the whole of life. What you are proposing is not IHT: it is a tax on gifts levied on the giver, with both a yearly allowance and a lifetime allowance; death does not have anything to with it any longer. So your logic “you need less money when you’re dead” (which I can understand, even though I disagree with it) cannot be used to justify such a tax – a different justification is called for.

  • 35 underscored September 21, 2014, 8:51 pm

    An Englishmans home is his prison

  • 36 Tedious Pseudonym September 21, 2014, 9:15 pm

    Gosh, well, we have got into a pickle – who knew The Investor was in fact a secret “red” 🙂

    As you say, there are any number of arguments against an essentially full “grab” of a person’s assets upon death. What, for example, about unmarried couples – kicked out of their home and left destitute?

    One more obvious problem is that of the inevitable perversion of incentives that would follow such a rule. It would heavily disincentivise saving and investment, at a time when most people are already less than willing to save for the future. It would encourage the old to spend themselves silly, and at least in a reasonable proportion of cases, run out of money long before they die. Good for cruise companies, less so for anyone else.

    Why would I want to leave my hard earned assets to Ed Miliband (by way of example – most politicians are the same) to use to buy his way into power? Any politician would benefit from the promise of spending other people’s money on you – especially if they’re dead.

    On it goes, and the only logical conclusion is no one would own anything (nor would they want to, if the risk is you pay for it and then die). You would buy absolutely everything on lease, and spend all your money. Great for GDP for a while – but probably for other people’s, as we’d have no savings to invest. Hmmm.

    As an aside, I don’t think Central London property is, per se, a bubble. I am involved in development in prime London, and it’s just irrelevatn to compare it to anywhere else in the country – it’s effectively an international “safe” zone to put your money, as well as have somewhere to live – but Clapham is unlikely to become Mayfair any time soon.

    Of course the average punter can’t afford to live in Knightsbridge, but when could they?

  • 37 Tedious Pseudonym September 21, 2014, 9:19 pm

    Oh, PS, re the oft touted “fact” that it’s more expensive in the UK because we think property in an investment, where others in Europe don’t, the answer is because England (overall) has a population density over twice that of Germany’s, and in the south east, it’s nearly 3.5 times.

    Buying your house isn’t an investment, it’s an option on fixing your rent – vital when the country is getting ever more densely populated without anything like enough new homes being built.

  • 38 SL September 21, 2014, 11:44 pm

    As someone who through fluke ended up born into a family in one of the country’s most expensive outside of London towns, it is worth putting the counterpoint that sometimes it isn’t that much of a blessing. Due to the insanity of the UK property market, prices keep on rising – largely driven by the lottery wages of our financial services industry. My brother and sisters and I could not afford to live with our families in the same way a generation earlier could in our home town, despite all earning comfortable wages. I am sure that to someone from outside of the South East bubble this would sound deeply unconvincing and little deserving of any sympathy, but there is an entire generation of thirtysomethings chased out of their home towns by the same high house prices that have supposedly done their families a favour.

  • 39 ermine September 22, 2014, 12:12 am

    @Tedious Pseudonym there’s a lot of straw mannism going on in your post. F’ristance, as you probably very well know, the issues of surviving spouses and civil parters is already adequately recognised and dealt with – they don’t pay IHT.

    The thing that is deeply wrong with leaving money untaxed to your descendants is that it truly shafts others as time goes on, leading to dynasties and aristocracy. This was only rolled back after the Second World War, and rightly or wrongly we seem to prefer to reward people for what they do and the value added by their actions rather than who they are, or more pertinently who their parents, grandparents and ancestors were. In terms of property the natural urge of parents to assist their own children clobbers the ability of other people to compete in the marketplace for something that is pretty low down on Maslow’s heirarchy of needs. Passing down capital to your children to buy houses will jack up house prices relative to earnings ratcheting up the price as a greater and greater store of wealth chases a finite resource.

    There’s nothing wrong in you having the big house on the hill if you earned the money to buy it or you took risks to lever your position to get it. The rich as well as the poor will always be with us, because ability is not evenly distributed, and that’s fine. There’s a lot wrong in it if your Mum and Dad, or more likely Gramps did the work and you didn’t. Why should this go to you? We have had hundreds of years of feudalism, this is still stamped on Britain is the pattern of land ownership, which distorts farming and partially distorts housing costs. An exception was struck by the aristocracy with IHT regarding agricultural land with the reforming postwar governments, because, well, you wouldn’t like to break up the family farms, would you? This was believable in the 1950s, but ss a result agricultural land is uses as an IHT-free dynastic store of wealth where the actual farming is ‘farmed out’ to big contracting organisations.

    I don’t know what the right answer to this is, but it surprises me that it isn’t part of the political debate. Income taxation is a hot part of the political debate and has been for years. There are various things wrong and right about wealth taxation per se, but inheritance tax (with the sensible exemption of the surviving spouse) is a good point where you can value the estate, and the person who earned the wealth really, honestly, is past caring. The Telegraph is full of arrant BS when they call it a death tax – you are already well dead and past it. As TI intimated, cheating death is not an option on the cards. You should be well six foot under by the time HMRC come to call.

    At the moment, IHT is probably one of the last thin lines that preserve some link between wages and house prices amongst other thigns. Once the Telegraph gets what it wants, they will be linked to wages + the ancestral accumulation of wealth built up by your forebears. Some people will have 10 lifetimes of accumulated income, and some will start with sod all. Maybe the reason it exercises me is because I was one of those who started with sod all. I was able to earn enough to buy a house and retire early from a standing start. If I were a generation or two down the line I’d be competing with your kids staring from 0 plus your lifetime net earnings and OldPro’s son and OldPro’s lifetime net earnings. And I’d be stuffed – not because I’m a lazy bugger but because I don’t start with ancestral wealth. And so in a couple of generations the aristocracy will own all the bloody land and the serfs will rent it from them – not because they made the money themselves but because they were born with a silver spoon in their mouth.

    I don’t know what the right answer is and any tax system generates distortions and perverse behaviour and incentives. But the iniquity of the situation to future generations should be called out and at least the stakeholders should be represented. At the moment whenever you hear about IHT the noise and hum is from those who stand to lose in a theoretical way – after they are pushing up daisies. That’s grand, but let those who are going to take the royal shaft from it at least have representation – they need it, because many of them are as yet unborn.

    The desire to feather-bed your children and view them as an extension of yourself is strong and understandable, ditto the desire to cheat death. However, we do try and have some general rules to protect the weak from the strong, and inheritance tax is one of them. You really, really, can’t take it with you.

  • 40 Simon September 22, 2014, 9:42 am

    Fascinating as ever. I do think that we are beginning to see the impact of a truly global market and that London (and the greater South East) is a distinctly different prospect as compared with less affluent UK regions that make up the major part of the UK which may not be ‘fair’ but does suggest that with help, the regions could benefit from London’s success, after all the UK isn’t a big country. As the appeal of the capital seems to gather pace, this is where people want to be both to live, because it is one of very few capitals of international culture and where there they want to work, because there is work in what is, in (when New York isn’t) the top financial capital of the World. The craziness of Calais bears testament to this. London’s HPs will become increasingly affected by overseas investment whether sovereign wealth from the Middle East or individual buyers from Asia in particular, by virtue of its burgeoning middle class which sees the UK as a reasonably safe bet for investment (legally and economically) and home to some of the world’s premium prep, secondary and university education, again London and the S.E. being the focus with Imperial now being the second best in the World, the LSE, Oxford and Cambridge all in the top ten. Will the London HP market crash? Even if the green belt disappeared overnight, I don’t think so.

  • 41 Gally September 22, 2014, 11:09 am

    People should remember that old people with big houses pay the highest levels of Coucil tax all their working lives and still do so on much reduced incomes in retirement. Equally children tend to be more mobiles these days and need somewhere to stay when visiting parents in what was once the family home.

    With children having families later then downsizing that was once feasible in late 60’s is now taking place in late 80’s where it releases the funds to pay for care. I would love to sell up and move but two/three bed smaller properties with a postage stamp garden nearly cost as much as my 4 bed detached in London after costs. Financially it better to wait until my 80’s and my grandchildren have left home in 15yrs time.

  • 42 Tedious Pseudonym September 22, 2014, 11:15 am

    @ermine You won’t be surprised to know that I disagree; as a starter for ten, I did specifically say unmarried couples – civil partnerships are to all intents and purposes, a marriage.

    There are many circumstances in which the IHT proposal would be unfair to say the least. I, for example, have a 3 month old son, and am not married to my partner. If someone were to kill me on my bike this evening on the way home, do you suggest that my family should suddenly lose everything, and my son be brought up in relative poverty just because you want my house and my money? Should I be forced to get married – to my mind a specious “contract”, but that’s another debate – just for the purposes of “tax planning”?

    I’m well aware that when you’re dead, you’re dead, but part of the enjoyment of life is knowing that you have looked after your loved ones and that they won’t be destitute if you were to go.

    Too much of the argument is focused on people who die of old age, in essence, leaving substantial wealth to already middle aged and potentially relatively well off children.

    If you know that dying will ruin your family as well as the emotional issues involved, life would become a very boring place as you wouldn’t take any risks you could avoid.

    Given, I take it from previous posts, you were born in England at some point in the last 60-70 years, the idea that you were born with “sod all” is disingenuous in the extreme, and frankly pretty offensive to those who really were.

    You were born in a 1st world, very wealthy country, with free, all encompassing health care and education, at a time when medical science has meant you’re very likely to live for vastly longer than just a couple of generations ago.

    We live in relative peace, with a reliable and essentially fair justice system. We have benefits which, whilst far from “generous”, still allow for a level of lifestyle that poor people from say a century ago would think absolute luxury.

    I’ve a friend who is Afghan, and who quite literally walked and hitch hiked his way to the UK over a 5 year period, via Iran, Turkey, and Germany. He really was born with sod all, and had to make do with what he had – which he did. He now speaks 6 languages, has worked across the globe, and now works for the Army training people heading out to various of the ‘stans.

    The real problem with IHT though, is that it’s a tax and the money goes to the government, which, in our democratic system, is short termist and liable to spend all your money buying the votes of marginal voters, rather than in a practical and fair sense.

    Any tax at a punitive rate – over 50% is apparently the point at which people think taxes are unfair and start to go out of their way to avoid them (I can’t remember where I read that research, but it neither here nor there) – I think we can take it as read that a 95% tax will heavily incentivise people to avoid it one way or the other. What if I send my child to private school? Should I pay 19x the fees in taxes as well? Or buy them a car? Or an ice cream? Where does it end? You might think it facile, but it’s a logical point.

    Since the focus here is on property, surely the only sensible suggestion is for all property to be left to a sort of “national trust”, who can then rent out housing in a housing association manner, rather than just cash for the government to waste on international IT companies and the like. Soon enough, most property in the UK would be owned in this way, rents could be cheap and unfair (not all housing is equal, after all), or market driven and “fair”, but to what end? Welcome to the DPRK.

  • 43 oldthinker September 22, 2014, 11:46 am


    IHT cannot in and by itself address the issues pointed out by you: wealth can be inherited free of IHT by means of lifetime transfer. You would have to go all the way and tax gifts (as, in effect, suggested by Grey Gym Sock above), after which the ‘pushing up the daisies’ argument would become quite irrelevant.

  • 44 Grumpy Old Paul September 22, 2014, 12:33 pm

    Why not tax the recipients of inherited wealth instead of their benefactors?

    Wealth inherited could be taxed at an individual’s highest income tax rate which would encourage people to distribute their wealth more widely and, perhaps, more equitably.

    I’d structure the tax regime so that this yielded more revenue than IHT and use the additional revenue to reduce the NI+basic rate income tax and also raise the threshold for 40% which has suffered from fiscal drag over the years.

  • 45 The Investor September 22, 2014, 1:00 pm

    This is a great thread, with loads of useful comments from all sides of the debate, and the refreshing lack of name calling I like to see on Monevator (although we’ve all made our little quips, I think it’s been in the spirit of good-hearted banter rather than nastiness).

    I will concede that it’s persuading me that my IHT fantasies would not just be un-electable, but might ultimately prove completely unworkable. That said, I do think we could make tweaks to the system, as some have suggested here.

    So where does that leave me when it comes to my fears/aims? I guess with Bill Gates’ “giving pledge”, where the wealthy pledge to give away at least half their estates on death. Perhaps if that became normalized then it would be unseemly to leave huge amounts of money to your heirs without at least leaving the same to other causes. (As I’ve already said, I can understand the desire not to deploy it towards tax/government. But there’s plenty of credible need in the world that can be met by legitimate agencies/charities).

    The trouble with a voluntary system like this is that presumably over time the generous rich would become poorer, and the greedy rich would become dynastically entrenched, as the latter would never tithe away their wealth.

    I’m far from a “red” as I would have though obvious, but I am very interested in rising inequality, which amongst many other things I think is a threat to capitalism.

    I’m curious if those of you who are minded to keep IHT low for (understandable) personal reasons concede there’s a macro-problem with housing/other types of entrenched wealth at all? Or do you think the “rich getting richer” is just a blip from the recession? (I think there’s much more than housing to blame — e.g. technology and globalisation — but equally I don’t think it’s a good path for our society to stay on indefinitely). Or do you fundamentally not care — to the winners the spoils and all that?

    I’m genuinely concerned about living in an economy where housing equity is passed down the generations and only the best/luckiest/most determined segment of those who are born without it eventually achieve it. We’re not there yet, but we’re clearly going that way.

    Of course a great and market driven solution would be if high property prices drove entrepreneurship and wealth creation outside of London and the South East. I agree property is much less expensive / not in a bubble in much of the rest of the country.

    Unfortunately though, the current trend seems to be another variation of ‘the rich getting richer’ when it comes to cities/regions, too, with network effects and wotnot sucking more talent and capital into London, not less.

  • 46 Dragon September 22, 2014, 1:45 pm


    Just a couple of snippets in relation to your “feudal system” comments.

    You need to be careful to draw a distinction between England & Scotland here.

    In Scotland, the feudal system was formally abolished, with effect from 28/11/2004. At the same time, the maximum length of leases for commercial properties was fixed at 175 years, to prevent feudalism creeping in by the back door via English style 999 year “virtual freehold” leases (residential leases are already limited to a max of 20 years).

    That said, I gather that the feudal system still exists in England (albeit for a lot of England, it is an irrelevance).

    If you want to ban inherited wealth and prevent people passing on property, there are always unintended consequences. High death duties originally made the aristos set up limited companies and put the family holdings into the company to avoid the taxes. Other likely results are that slowly, all property ends up owned either by government, government bodies or companies. Not necessarily a good thing either.

    At the risk of being broad brush, most people live in conurbations of one sort or another – towns, cities, etc. Most of the “land” owned by the aristos is just that – land, either used for farming, hunting, etc and likely so bound up in conservation and planning laws that they couldn’t develop much of it anyway in the way they might choose to if they had total freedom to do so. Not sure how much the average aristo is really interested in buying up vast numbers of regular flats, semis and detached houses in the regional cities, but I suspect not much (as in the Aviva adds, I suspect the reality for quite a lot of them is trying to hold onto what they have already and keep the roof from leaking, not adding to their holdings).

    If you’re really concerned about the “lucky” pulling up the drawbridge, then you also need to be concerned about e.g. foreign sovereign wealth funds snapping up large amounts of prime UK real estate. Maybe not so much an issue with say the likes of Norway sharing Regent Street with the Crown Estate, but what if e.g. Russia or the DPRK started doing the same?

    Ultimately, the biggest argument against higher IHT and death/estate/gift/etc taxes is that governments love higher taxes, but rarely spend all (or any) of this extra revenue on what people would like (better roads, better hospitals, bigger aircraft carriers, whatever), preferring instead (as someone alluded to above) to either bribe their client voter base (rich businessmen for the tories, those reliant on welfare for labour) or trying to bribe the marginals / floating voters.

  • 47 Dragon September 22, 2014, 1:47 pm

    @ermine – if you haven’t already, you might enjoy this book:


    Bit dry / heavy going at times, but well worth a read.

  • 48 magneto September 22, 2014, 3:43 pm

    “Or do you think the “rich getting richer” is just a blip from the recession? (I think there’s much more than housing to blame — e.g. technology and globalisation — but equally I don’t think it’s a good path for our society to stay on indefinitely). Or do you fundamentally not care — to the winners the spoils and all that?”

    TI You might have put your finger on a key issue with the word ‘globalisation’. For many years the UK has run a trade balance defecit. Time was when the goods bought in stores were manufactured in the UK!
    Anyone else remember that?
    Shop goods now made in China, or other eastern countries. So we buy the Chinese goods, the cash flows to China, China buys US Treasuries, Gold, UK Real Estate, UK Infrastucture. The cash flow means the UK is getting steadily poorer, as China gets steadily richer. OK you say what about the invisibles? What do they amount to?
    The only long term resolution may be that UK workers are forced to accept lower real earnings, so UK regains some competetiveness. Even so cannot see anything but a race to the bottom as Africa joins in. No sane politician dare mention lower real wages.

  • 49 ermine September 22, 2014, 4:45 pm

    @oldthinker – > IHT cannot in and by itself address the issues pointed out by you

    I agree entirely – there are very few silver bullets. I’m just surprised that there’s so little debate on this and what there is is so one-sided compared to, say, the debates about income tax. The compounding of inherited wealth has the potential to cause far greater inequality than income variations.

    @Grumpy Old Paul >Why not tax the recipients of inherited wealth instead of their benefactors?

    Oddly enough, we do exactly that. Nobody, but absolutely nobody, gets that tap from HMRC until the body is cold, unless they decide to try and live forever by circumventing IHT by some wheeze and they haven’t paid their advisers enough for them to get it right.

    @Dragon the existing aristocracy (as in ex-Norman stock) doesn’t greatly trouble me other than the perverse incentive on farming, which is bad as as the externalities hit everyone (pollution/runoff, CAP subsidies). But I would be surprised we don’t get BTL dynasties soon enough if IHT is abolished, and it’ll look more like Peter Rachman that the butler living out his dotage on the old estate.

    Since they aren’t making any more land, unlike silicon chips, iPhones, electricity or all other sorts of property it probably is worth having the political debate about where it’s likely to lead, if only to convince ourselves that our children or grandchildren won’t get to see/perpetrate the English Revolution we never had so far… It sounds like the Scots have already had that debate – they needed to because the inequality of land distribution is/was even worse there. I’ll see if the library has the book!

    > Not sure how much the average aristo is really interested in buying up vast numbers of regular flats, semis and detached houses in the regional cities

    The Duke of Westminster seems to do all right from Central London 😉 The long arm of the aristocracy even reached out to my parents – after he had repaid the mortgage, my Dad still had to pay £1000 to buy out the leasehold on his quite ordinary semidetached house in SE London, since the ground was still part of some landed holding until sold off to the great unwashed like him. That was a respectable amount of money in 1978

    @Magneto > Even so cannot see anything but a race to the bottom as Africa joins in.

    globalisation is greatly improving the lot of the Chinese and will do for Africa too. Like water levels will equalise – real wages in the west will be much lower, but not as low as the starting wages in, say Africa. As you say, no sane politician dare mention it, but it’s happening. It’s just that for once it is people in the West, particularly of average ability/skills who are getting the short end of the stick, and even more particularly those who rely on earned income.

    For all that, Britain is much, much richer in real terms than it was 30 or 40 years ago. There was a woman on MSE moaning that her student son in New Cross was in an “uninhabitable” flat that had rising damp six inches from the ground and the smell of damp. I grew up in New Cross before my family moved in the late 1960s. That’s what houses were like, before the UK discovered the benefits of central heating, double glazing and minimal draught-proofing. I think that’s a pretty impressive achievement, for Britain to have raised fundamental living standards that much. I’d be surprised if living standards fall back to the 1960s in the UK, and unlike TI I’m not an existential optimist!

  • 50 ermine September 22, 2014, 4:57 pm

    @Tedious Pseudonym the answer for unmarried couples I believe is to own the property as joint tenants which addresses the specific issue you raised.

    the idea that you were born with “sod all” is disingenuous in the extreme, and frankly pretty offensive to those who really were.

    I absolutely take your point, it’s a fair one, and I salute your tribute to the collective wealth we all hold/inherit in what used to be called the common weal. You are, indeed, surprisingly aligned with Obama’s You didn’t build that speech. We do indeed walk on the shoulders of giants – and this inheritance is so valuable because it belongs to nobody in particular 😉 It’s a gift from previous generations to us, and we of course don’t want to privatise this space.

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