Tackling intergenerational unfairness Contents

Chapter 7: Intergenerational taxation

Distribution of income and wealth

218.The tax and benefit system has the potential to shape fairness between generations by ensuring that generations do not pay in far less than they receive. In Chapter 2 we discussed the limitations of the published data on how the tax and benefit system affects different age groups. The ONS does not publish the effects of each tax and spending measure on different age groups. Nor does it publish longitudinal analysis to show how this has changed over time. It does, however, publish an overall summary of the effects of tax and benefits on households broken down by the age of a household representative307 as set out in Figure 7. Figure 7 shows that broadly the tax system takes more than it gives throughout a working lifetime and reverses that trend once a person retires and is supported by the State Pension and receives more support from the National Health Service.

Figure 7: Average net effect of the tax and spending by age of household representative

Bar chart showing average net effect of tax and spend by age

Source: Office for National Statistics, ‘Effects of taxes and benefits on UK household income: financial year ending 2017: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/theeffectsoftaxesandbenefitsonhouseholdincome/financialyearending2017 [accessed 31 January 2019]

219.Figure 8 shows how tax alone is split between different age groups. Individuals pay the most tax as they enter the later part of their working lives in their 50s and then once retired pay less tax than they paid in their working lives. The purpose of the social insurance system as designed by William Beveridge was that income from paid work would be taken through taxation and then paid out when that person was unable to work. As Professor Sir John Hills, Chair of Centre for the Analysis of Social Exclusion and Richard Titmuss Professor of Social Policy at LSE, describes it, “Much of what social policy does is still motivated by such life cycle variations in resources and needs.”308 Although it may not be as well adapted to perform this function in the context of the 100-year life.

Figure 8: Total direct and indirect taxation by age of household representative

bar chart showing total direct and indirect taxation by age of household representative

Source: Office for National Statistics, ‘Effects of taxes and benefits on UK household income: financial year ending 2017: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/theeffectsoftaxesandbenefitsonhouseholdincome/financialyearending2017 [accessed 31 January 2019]

220.After taxes and benefits have been applied to a household’s income and after housing costs are applied, the final distribution for different family types is described in Table 1.309 The results are clear. Households over the State Pension age have higher incomes than those below State Pension age with children but lower levels of income than those without children. This represents a profound change in recent decades. In the late 90s,310 those over the State Pension age were the group with the lowest incomes apart from single parents.311 However, an increased generosity of age-related benefits, increased private pension savings and an increase in the number of people over State Pension age in employment has changed this picture. The Rt Hon Frank Field MP, Chair of the Work and Pensions Committee, told us that if we were discussing intergenerational fairness a decade ago the agenda would have been dominated by pensioner poverty but due to the introduction of pension credit this changed so that poverty now “wears a younger face.”312

Table 1: Median income after housing costs by household type adjusted for household size (2015/16–2017/18)

Couple without children

£587

Pensioner couple

£463

Single male without children

£434

Single female without children

£424

Couple with children

£415

Single male pensioner

£408

Single female pensioner

£377

Single with children

£271

Source: Department for Work and Pensions, ‘National Statistics Households below average income: 1994/95 to 2017/18’ (28 March 2019): https://www.gov.uk/government/statistics/households-below-average-income-199495-to-201718 [accessed 28 March 2019]

221.The difference between people over and under the State Pension age is much larger in terms of wealth than income. As is to be expected, over the course of a person’s life they build up wealth. This saving is primarily in housing and pension wealth.313 This is desirable as it acts as a foundation for long-term personal and family security and supports them through retirement. The natural effect of this is that people over the State Pension age have substantially more wealth than people under it. Table 2 shows that to be the case and also shows families with children have less wealth than equivalent families without (as was the case with income). As this wealth is mostly in housing and pension wealth it is not easily accessible.

Table 2: Median total household wealth by household type 2014 to 2016

Couple 1 over/ 1 under SPA, no children

£703,000

Couple both over SPA, no children

£618,400

Couple, non-dependent children

£573,500

Couple both under SPA, no children

£331,000

Couple, dependent children

£238,900

Single household, over SPA

£232,000

2 + households/other household type

£163,700

Lone parent, non-dependent children

£154,400

Single household, under SPA

£95,000

Lone parent, dependent children

£28,900

Source: Office for National Statistics, ‘Total Wealth: Wealth in Great Britain: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/totalwealthwealthingreatbritain [accessed 29 March 2019]

222.The tax and spending system operates on a pay as you go basis, where, for example individuals who have received an education pay for the costs of the education of the children of others, and current generations of working individuals pay for spending on current older individuals. This means that the post-war generation paid for the pensions, health and care of the previous smaller generation rather than paying ahead for themselves. The large size of the post-war baby boom compared to subsequent birth cohorts will pose challenges to the intergenerational compact implicit in our tax and spending system in the coming years. The relative difference in size of the generations means that the country is under threat of increasingly living beyond its means.

223.The number of retired people who receive more from the state than they pay in taxes will grow as this age group draws State Pensions and increasingly requires medical treatment and social care. If the increased costs of later life for a growing older population were to be paid for simply by increasing the rates of existing taxes then, as to be expected from Figure 8, it would be primarily paid for by working age households. If no action is taken, then the costs of this spending will be added to the national debt, greatly increasing its size from its already enlarged state. This is not sustainable and the costs of servicing and repaying this debt will be borne by younger generations and the unborn.

224.In addition to the current offering of the NHS and social security support for older generations which struggle to be financed from existing tax revenue, longer life also creates the risk of large social care costs for a proportion of the population. There have been a number of recent attempts to review and reform the finance of long-term social care to ensure those claiming bear a higher proportion of the burden. Such reform is in our judgment necessary. The last proposal by the Conservative Government at the 2017 General Election was widely criticised as a ‘dementia tax’ and, in the climate of an election, was abandoned. However, the challenge of future social care costs deserves mature cross-party reflection–and, ideally, political consensus.

225.There is currently a lottery whereby if a person is incapacitated and requires full-time residential care, then the largest part of their personal wealth, including their home, is ultimately forfeit and if they require only continuing healthcare they keep the entirety of their savings. However, if an incapacitated person can remain at home, the value of their home is not included in the calculation of their contribution toward the costs of their care. There are also variations in approach across the country, which renders the whole system difficult—and often frightening—for the public to understand. We believe that those who sustain high costs in social care and who have the ability to pay should make a larger contribution and do so on an equitable basis. There is currently an investigation into paying for social care by the House of Lords Economic Affairs Committee.314 The Government is also due to release a long-awaited Social Care Green Paper. We have not therefore sought evidence here. Nor do we make recommendations beyond noting that while every person may at some point need social care due to the uneven size of generations, it is a concern for intergenerational fairness and is not a cost that can simply be pushed onto younger generations and those just being born.

226.In relation to National Insurance, respect should be paid to the widely held view dating back to the origins of the Welfare state—that it is by National Insurance Contributions individuals have paid toward their security in their old age. This concept may well have assisted in securing consent for taxation. But in reality the principle no longer holds as National Insurance Contributions are not linked to future spending on health, social care or the State Pension in retirement. The changes that are needed to the tax and benefit system are not about redistributing from old to the young but are instead a necessary part of ensuring that each generation contribute adequately toward the costs of the payments and services they receive.

227.If this does not happen the agreement between generations may degrade as the unborn are saddled with debt to pay for the costs of generations before them. The challenge of dealing with the costs of a larger generation has been apparent for decades but subsequent governments have failed to tackle it. Now is the time for action to ensure that government policy is sustainable for generations to come.

Age-related benefits

228.There is a case to be made that the relative enhancement of the incomes of those over the State Pension age in recent years and its effect on the relative incomes of different age groups is an issue of intergenerational fairness. Social security payments to those over the State Pension age have been protected from cuts to the social security budget since 2010. Frank Field told us that cuts to social security spending had focused on households of people under the State Pension age, whilst protecting the incomes of those over the State Pension age. He submitted House of Commons Library research to us which showed that social security and tax credit spending for those under the State Pension age would be cut by £37 billion per year by 2020–21 from previously projected spending, if there was no policy change.315 Since this analysis was conducted, a small portion of these cuts had been reversed but the large majority remain in place.

229.These changes to the social security system have entirely focused on reducing intra-generational transfers and have failed to consider the larger generational challenge. Instead, changes to the social security system have increased the size of the generational challenge. The State Pension has seen real terms increases as a result of the “triple lock” which was included in the Coalition Government’s Programme for Government in 2010. This triple lock means that the State Pension is uprated according to whichever is highest of wages, inflation or 2.5 per cent.

230.Between the Social Security Act of 1980 and 2010 the State Pension was only uprated with inflation and did not keep up with earnings increases during this period. The House of Commons Work and Pensions Committee inquiry into intergenerational fairness concluded that the triple lock had succeeded in restoring the value of the State Pension, but that provided “the new state pension is maintained at this proportion of earnings the work of the triple lock, to secure a decent minimum income for people in retirement to underpin private saving, will have been achieved.”316 It also suggested that maintaining the triple lock indefinitely would be unsustainable. Frank Field told us that he still supported this conclusion but was worried about its political ramifications.317

231.The TaxPayers’ Alliance told us that it was “egregiously unfair” that at a time of spending restrictions on young people that the State Pension was rising at such a high rate. It also suggested that as there was a public spending deficit the cost of these rises was being paid by future generations. It recommended that the State Pension should be frozen.318 Whilst there is a case for spending restraint it does not seem fair for people reliant on the State Pension to fall behind working people. Nor on the other hand is it fair for them to have their incomes lifted at a faster rate than that experienced by working people.

232.The triple lock for the State Pension should be removed. The State Pension should be uprated in line with average earnings to ensure parity with working people. However, there should be protection against any unusually high periods of inflation in the future.

233.Alongside the State Pension there are a number of other age-related social security payments. These benefits do not appear to be well targeted to achieve their purposes. An example of this is the Winter Fuel Payments of £100–300 (depending on age and whether the individual lives alone) are made to all over 65s, in theory, to help them pay their heating bills.319

234.Professor Hills told us that Winter Fuel Payments “are almost the least effective way of coping with fuel poverty.”320 Government fuel poverty statistics suggest that Winter Fuel Payments are not well targeted for those who experience fuel poverty.321 Single parents are substantially more likely to be in fuel poverty (26 per cent) than either single people over 60 or couples over 60 (fewer than 10 per cent of either group). Households where the oldest member is 16–24 are more likely to be in fuel poverty than any other age group. Similarly, households where the youngest member is under 15 (16–21 per cent) are significantly more likely to be in fuel poverty than those where the youngest member is over 60 (eight per cent). Households where the youngest member was 11–15 had an average fuel poverty gap (the amount needed to exit fuel poverty gap) of £386 compared to households where the oldest member was over 75 which had an average fuel poverty gap of £262. Professor Hills suggested that the money from Winter Fuel Payments should be diverted to something that “made a difference to the people at risk of fuel poverty”. He indicated that “a permanent solution” involving the “insulation of their homes” was preferable.322

235.Across the UK older people can apply for an older person’s bus pass, but the age differs according to where in the UK someone lives. In London, Wales, Scotland and Northern Ireland the free bus pass (and certain other travel concessions) begins at age 60 whilst for the rest of England it applies from the age of 65 and is scheduled to rise with State Pension age. Warwick Lightfoot, Head of Economics and Social Policy at Policy Exchange, questioned the fairness of bus passes for older people which allowed individuals in their early 60s to receive free transport whilst still working, when the funding for services for those who have serious difficulty in accessing transport like Dial-a-Ride, was severely restricted.323 However, there is an environmental case to be made for incentivising less able older people to use public transport rather than a car for short, or medium range, journeys that younger people would be able to walk or cycle.

236.A further benefit that goes to older people is that they have access to a free television licence if they are over 75. A TV licence costs £154.50 per household.324 This cost is met out of the BBC’s budget. It is estimated that it will cost £745 million a year by 2021/22 which is equivalent to 20 per cent of the BBC’s current budget for programmes and services.325 The BBC is currently considering the future of the free TV licence. This Committee does not consider the method of financing the BBC to be a factor in determining the intergenerational equity of this benefit. The overall structure of the licence fee is beyond our remit. However, we note that it is inappropriate that the BBC should be tasked with funding the social policy goal of supporting older generations. If the Government wishes to subsidise the licence fee, the BBC should not carry the cost.

237.In our submission, free television licences for all over a certain age should be phased out. Those who can afford to pay for a television licence should do so. The poorest may be subsidised directly by the Government, if it so chooses.

238.Rory Meakin, Research Fellow at the TaxPayers’ Alliance, suggested that most of these age-related benefits should be means tested. He told us that the current terminology is insulting to older people in suggesting that they should spend their money in particular ways and that a more dignified solution would be for them to be given as an undirected credit to people on low incomes.326 Professor Hills warned against means testing these benefits. He informed us that reducing means testing had been an important principle of the Pensions Commission, as means testing caused negative disincentive effects when combined with taxes which affected people’s decisions on saving and earning. Warwick Lightfoot told us that means testing creates an administrative nuisance factor. An additional concern noted by Carys Roberts, Senior Economist at the IPPR, was that pension credit (a means tested age-related benefit) has a very low take up and the process of means testing “because of the structure of families … ends up being quite regressive.”327

239.Frank Field suggested that these age-related benefits should be treated as taxable income for the purposes of income tax as a way to create fairness between generations. He stated that the benefits received would “just be entered on our income tax forms.”328 However, as Steve Webb, former Minister for Pensions, told the House of Commons Work and Pensions Committee “most people do not fill in tax returns.”329 Warwick Lightfoot told us that a prominent reason for recent changes to the older person’s tax regime was to ensure that as few older people fill out tax form as is possible.330

240.Professor Hills suggested that existing benefits could be “grandfathered” out of the system.331 This would mean that the age at which you receive the credit is raised but it is done in such a way that people’s immediate budgets are not upset. This is in some way a similar approach to the Government’s proposed future changes to the State Pension age, where it has announced the ages it will rise to well in advance of the time that individuals who would be affected by the change reach that age. Whilst this can be an effective approach, if done poorly or without sufficient notice it can have negative consequences for specific cohorts. This can be most clearly seen in the case of women born in the 1950s who have seen their State Pension age rise as part of government efforts to equalise men and women’s State Pension age. Any future changes must ensure that they do not hit the cohort which has already lost out most from other changes in the State Pension age.

241.The Government should seek to target existing age-related benefits better at individuals outside the workforce. Age thresholds should be raised. From 2026–28 when the State Pension age is due to rise to 67, free bus passes and Winter Fuel Payments should be available no sooner than five years after the State Pension age and age thresholds should be aligned across benefits. The difference should be maintained from then on as the State Pension age rises. There should be transitional protection so that individuals who currently receive these payments continue to receive them. This should ensure that the cohort of women who have been most severely affected by changes to the State Pension age would not suffer a double disadvantage from this subsequent change.

242.Alongside changing the age of applicability, the Government should investigate the feasibility of treating these benefits as taxable income for those above the tax threshold without requiring individuals who currently do not complete an income tax form having to fill out a form.

National Insurance

243.One area where the tax system explicitly advantages older people over people younger than the State Pension age is National Insurance Contributions. Employees over the State Pension age do not pay employee National Insurance Contributions. Frank Field suggested that this current situation was not fair. He stated the principle that a person who is working should be taxed in the same way as any other person working.332 Paul Johnson, Director at the IFS, described this situation as “hard to justify on any normal grounds.”333 Professor Hills told us that there “was a logic to the system when most pensioners were poor” but that this is no longer the case.334

244.John Glen MP, Economic Secretary to the Treasury and City Minister, told us that the reason employee National Insurance Contributions stopped at the State Pension age is because “National Insurance is a contribution made towards a contributory benefit. When you reach retirement age, you have made that contribution. Subsequently insisting on an additional tax when you have already reached your entitlement to that benefit does not seem to hold true.”335 Professor Hills described this contributory benefit as “an accounting fiction” based on the idea that we pay in our working lives and receive benefits after retirement.336 However, as acknowledged at the beginning of this chapter, individuals do not pay in to fund their own benefits, they pay for the current older generation. Professor Hills told us that tax and spending contributions had not worked out evenly between generations, partly due to increased life expectancy not being reflected in higher State Pension ages, resulting in “a benefit for people born between 1945 and 1960.” Warwick Lightfoot warned that the idea of a contributory system is very popular, that people do not like it when there are changes in terms of what needs to be contributed and that the erosion of this contributory system was a source of irritation for some people.337

245.Paul Johnson suggested that the one way in which having a lower tax rate on people over the State Pension age could be justified would be to encourage employment. He told us that “65-year-old men are quite responsive to different tax rates.”338 Warwick Lightfoot stated that the international evidence shows that taxes like National Insurance Contributions affect people’s working and saving decisions and can remove people from the labour market.339 John Glen MP argued that the current system “creates an incentive for people to work longer if they so wish.” As discussed throughout this report, government policy must support individuals remaining economically active for longer as part of a 100-year life.

246.Caroline Abrahams, Charity Director at Age UK, also made a fairness argument for not charging individuals over the State Pension age:

“What if you have been in a really well-paid job, you retire on a great pension and you can have a wonderful retirement to look forward to, as opposed to somebody else who has struggled all their lives financially, has not built up a good state pension record and is forced to work past the state pension age. Why should they lose out, relatively speaking, compared to somebody else? Is that the right group of people?”340

247.However, this argument relies on the idea that people who stay in work after the State Pension age are relatively less well off than those who retire at that point. The evidence we received from the researchers behind the Understanding Society survey suggested that this was not the case. They presented research showing that decisions to continue working after State Pension age “were not strongly associated with financial difficulty”.341 The evidence suggests that most individuals who work beyond the State Pension age choose to do so for their own benefit rather than being forced to by their circumstances. It is also to society’s benefit that they continue to work, contributing to the economy and to the Exchequer through their work. On the other hand, the justification for keeping a sharp policy delineation between people receiving a State Pension and those who do not makes less sense when people are working longer. Old age should not be defined by the receipt of the State Pension.

248.The National Insurance system functions poorly. NICs do not pay for the State Pension even though they are used as a way to determine eligibility for it. They are not linked to any actual rules on the size of State Pension and the Government does not treat it as a future liability in the Whole of Government Accounts. There are strong arguments for the Government to consider greater alignment and the eventual merger of the NICs and income tax systems.

249.The reality of longer working lives should prompt the Government to rethink the National Insurance system. It is not fair that only individuals under the State Pension age pay this tax. Individuals over the State Pension age should contribute. Older people with lower incomes could be protected from this change by aligning the NICs threshold for this group with the income tax personal allowance.

Property taxes

250.One idea raised in the evidence we received was that the generational funding challenge could be met by increasing taxation on the wealth of older people in society. As property and pension wealth make up the majority of this wealth and pension income is already taxed, individuals with this view have chosen to focus on property taxes. Proponents of wealth taxes argue that property taxes can fulfil two functions in terms of intergenerational fairness. Property taxes could be a way of raising more revenue from generations with a larger amount of property wealth and could also have a behavioural effect by increasing the cost of living in more expensive property. This, it was argued, would have the effect of forcing some people to “downsize” or sell their family home in order to meet the costs of property taxation.

251.Although this taxation of wealth would have the once-off effect of contributing to the financing of spending for older generations, it would also have a long-term effect on taxation through the lifecourse. Today’s younger generations would face the same costs of property taxation on any property that they are able to accumulate. To some degree this would reduce the extent to which it solves any intergenerational problem as it would be borrowing from younger people’s future. Younger generations who do not have the same problem of living in a larger cohort than the one they are financing the retirement of would end up paying for the cost of their retirement twice: once through paying in through the tax system during their working life and then again through wealth taxes in their later life.

252.The nature of the housing difficulties that younger generations face and the amount of property wealth that older generations have differ widely across the country. The average household in the North East has £44,000 in property wealth whilst in the South East they have £170,000.342 In the context of property taxation, including stamp duty, there is a case for investigating regional taxation of property to match this regional inequality. This could still be administered by central government. The Government already applies different standards to London and the rest of the country in relation to some of its interventions in the housing market, such as Help-to-Buy or Lifetime ISAs. However, there is not enough data on the intergenerational effects of regionalisation to make useful recommendations at this time. As a result, in this chapter we have concentrated on issues that underlie the current national system of property taxation.

253.The OECD estimates that in 2017 the UK collected the second largest amount of property tax of any OECD country, with only France collecting more.343 It estimates that the UK takes 4.2 per cent of GDP in property taxes, a similar amount to the United States but less than the 4.4 per cent collected by France.344 The average for OECD countries is to take 1.9 per cent of GDP in property taxes. The two largest taxes on property in the UK are Council Tax and stamp duty. Of these two taxes, Council Tax is by far the larger, estimated to have raised £32.1 billion in 2017–18, whilst all property transaction taxes, including stamp duty, raised £13.6 billion.345

254.Council Tax, while being the UK’s largest property tax, was not designed as a property tax. This explains some of its apparent oddities. It was introduced to contribute towards local government services, as a replacement for the Community Charge (also known as the Poll Tax) which was a flat service charge to fund local councils. The Community Charge was seen as unfair as it levied tax on everybody whether they owned property or not and did not reflect the value of property. The Community Charge was itself a replacement for the Rates system which was also seen as unfair as it did not bear any relation to income or numbers in a household. Council Tax was created as a compromise between the two systems as a charge for services that varies by property value but with less variation than the previous rates system. In reality, Council Tax covers only a proportion of each local authority’s cost. If Council Tax was reclassified as a service charge rather than a property tax, then the UK would have levels of property taxation that are much closer to the OECD average.346 If Council Tax is treated as a property tax, then, in its current form it fares quite poorly at achieving the aims of proponents of property taxes.

255.Paul Johnson told us that the right way to think about Council Tax is as tax on the consumption of housing, but that a good tax on the consumption of housing “ought to be broadly proportional to the value of the property” whilst Council Tax “is regressive in the value of the property; it rises at only half the rate of the value of the property and it is capped. You can see that as a straightforward inequity in the sense that you have a lower proportional tax on more expensive properties.”347 Furthermore, he informed us that this difference has a particularly intergenerational effect as older generations tend to own more expensive properties and so benefit from being taxed less proportionately by Council Tax.348 However, whilst many older people owning properties are capital rich as a result of large increases in asset prices, some are income poor.

256.The Rt Hon The Lord Willetts highlighted the fact that some local authorities charge a lower rate of Council Tax on second properties as an additional unfairness and suggested that it should be redesigned.349 Professor Hills told us that Council Tax should be redesigned so that the rate charged was more closely related to the size and capital value of the property alongside additional protections for people who are asset-rich but income poor through a system of delayed payments. He showed us an example to highlight the problem with the current system of Council Tax:

“I looked last year at a flat in Kensington for sale for £300,000 and a house for sale a mile away for £30 million. The Council Tax in Kensington and Chelsea payable by the £30 million house was £24 a week higher than that for the £300,000 flat.”350

257.Rory Meakin disagreed with this approach, arguing that property values are high due to scarcity and that the “solution is not to tax the upside for the winners of that scarcity. Instead, it is to reduce the scarcity in the first place, i.e. build more houses.”351 Warwick Lightfoot agreed, stating that there is “a housing supply issue and we are not going to resolve it with a housing taxation solution.”352

258.Professor Hilber, Professor of Economic Geography at LSE, told us that an annual tax on property value could be very efficient and if done at the local level could encourage increased housing supply. He told us that:

“If it is done at the local level it has the added benefit that it provides tax incentives to local authorities to permit development. Right now, they face most of the costs of development at the local level and they face the NIMBY residents who do not like development, so it is understandable that they do not want to permit development, from which they have very little tax revenue.”353

259.Council Tax is an incoherent combination of a property tax and a service charge. If the Government decides it would like to continue to fund local authorities through a tax partly based on property value, then it might reform Council Tax so that it adheres to the following principles:

(1) A reformed tax should more closely mirror the value of the property than the existing Council Tax system.

(2) It should include a method for allowing individuals with low incomes but high asset values to delay payment until the property is next sold or transferred.

(3) Second homes should pay the full rate of local tax.

260.Whilst the evidence we received was mixed on the desirability of reforming Council Tax, our witnesses were almost unanimous in support of reforming stamp duty. Stamp duty is seen as reducing the liquidity of the property market. By increasing transaction costs, it incentivises the “upsizing” of existing homes where people choose to invest in increasing the size of their existing home rather than paying stamp duty on purchasing a new home. This could decrease the number of smaller homes which are more suitable for first time buyers.

261.Paul Johnson told us that that governments liked stamp duty because it is easier to collect and that there has been “a big rebalancing away from Council Tax towards stamp duty over the last 20 years.” He suggested that you would expect an increase in stamp duty to decrease transactions and that is what has happened, although causation is harder to prove. The result of taxing transaction is that “housing will be misallocated between people and between generations.”354 Lord Willetts described stamp duty as a “classic bad tax” which impedes transactions and stops older people from trading down into smaller housing. He suggested that it should be reduced.355

262.Professor Hills told us that stamp duty means that property transactions are “gummed up by people who feel that it is too expensive to move and [decide] it is better to leave property empty or to not downsize”.356 The Rt Hon The Lord Forsyth, Chair of the House of Lords Economic Affairs Committee, told us that stamp duty in London has “brought some sections of the housing market to a complete dead stop.”357 He also stated that it was important to decrease stamp duty in order to reduce the burden for people who are downsizing.358 Professor Hilber presented his research which showed that stamp duty has a particular negative effect on short-distance moves and housing-related moves which could mean that attempts to downsize are particularly affected. He also warned that “Jobrelated mobility could also be negatively affected.”359 Rory Meakin told us that stamp duty is a “terrible tax” because it keeps older people in larger homes and prevents them from moving somewhere smaller.360 Carys Roberts summed this up neatly with her statement that she did not think she had “met an economist who thinks that stamp duty is a good tax.”361

263.John Glen MP, Economic Secretary to the Treasury and City Minister, told us that the Government had made substantial changes to stamp duty so that “23 per cent of people pay no stamp duty at all, while over half of transactions—51 per cent—are less than £2,500. The main intervention that we made was to remove stamp duty for first-time buyers up to £300,000, while first-time buyers up to £500,000 pay a lower 5 per cent on sums between £300,000 and £500,000.”362 Paul Broadhead, Head of Mortgage Policy at the Building Societies Association, suggested to us that this decision to reduce stamp duty for first time buyers “clearly has helped many people get on to the housing ladder.”363 However, John Glen argued that stamp duty was not an important lever on all purchase decisions and did not have much effect on people’s decision to downsize:

“From the evidence in the reports from the National House Building Council in December 2017 and the International Longevity Centre in January 2016, the actual amount of stamp duty that they would pay—£2,100 for a property of £230,000, in the example that I have given—is less than one-third of the estate agent’s fees. Most of the evidence from the National House Building Council is that it is other factors, such as maintenance costs and security, that determine people’s choice to downsize.”364

264.Whilst there are many other factors that affect an individual’s decision to downsize or upsize their property, it does not make sense to have a tax on transactions, introducing large amounts of friction into the housing market during a housing crisis.

265.Stamp duty has seriously distorted the housing market. The Government should review the effect of stamp duty on the liquidity of the housing market and consider how stamp duty could be reformed to improve the housing choices and availability for young families.

Inheritance Tax

266.Some advocates of wealth taxation support limiting intergenerational transfers as a way of meeting the costs of the generational challenge outlined above. However, others argue that as accumulated private capital naturally flows from one generation to the next, it is unclear in principle that reducing the amount that any part of a subsequent generation receives of the wealth of the previous generation improves intergenerational fairness. Inheritance Tax is the current instrument for diverting such intergenerational capital flows to the Treasury. Above the threshold it acts as a tax on the transfer of the assets of a deceased individual to any person or institution other than a charity. As most retained wealth is possessed in pensions and property, most inheritance is in property, as pension wealth is largely used to finance later life. It is applied at a 40 per cent rate over the Inheritance Tax threshold. The basic threshold is £325,000, this rises to £450,000 if a main home is being given to the deceased individual’s children or grandchildren. Any unused threshold can be passed on to a partner meaning that a couple can leave up to £900,000 tax free if this includes their main home and is being given to their children or grandchildren.365

267.Stamp duty data from 2017/18 finds that 1.8 per cent of properties sold in the UK were sold for over £1 million (up from 1.7 per cent in 2015/16) rising to 2.5 per cent in the South East (up from 2.1 per cent in 2015/16) and 9.3 per cent in London (up from 7.9 per cent in 2015/16).366 This suggests that few children outside London currently pay Inheritance Tax solely on the basis of the value of a single property. However, the thresholds for Inheritance Tax have not been rising with inflation so in the coming years it is entirely possible that an increasing proportion of properties in London and some parts of the south east of England will attract Inheritance Tax when their owners die. In addition, where inheritance is not given to a direct descendent, greater numbers will be caught more widely.

268.Inheritance Tax raised in 2017/18 £5.2 billion and that is set to rise to £6.9 billion in 2023–24.367 However, the growth in Inheritance Tax receipts is at a slower rate than the growth of inheritances as a whole.368 Internationally, there are a wide variety of policy choices on whether or how much to tax inheritance. New Zealand, Australia, Sweden and Canada have abolished their inheritance taxes whilst for Belgium, France and Japan, inheritance taxes make up a larger portion of tax revenues than it does in the UK.369 As life expectancy increases so does the age of those who receive inheritance. The likelihood of receiving an inheritance increases as individuals age, with those who are 55–64 the most likely to receive an inheritance and this is also the age group that receives the largest inheritances.370 Every generation at some point in life may hope to inherit or aspire to bequeath the fruits of a fulfilled working life. Even in the case of later life inheritances, resources received could help many individuals with support they will need in the latter part of the 100-year life.

269.Financial and other support that flows between generations is evidence of the strength of the intergenerational compact. For many families, Inheritance Tax is a source of concern. There are a range of views on Inheritance Tax. Just as with stamp duty, our witnesses thought that Inheritance Tax needed reform. Lord Willetts described Inheritance Tax as “a classic bad tax” due to it having “a very high rate that sounds very scary but with very few people paying it.”371 Carys Roberts from IPPR told us that it was easy to avoid if you are “wealthy, healthy and well advised”.372 Lord Willetts explained that anyone who had the capacity to give away their wealth more than seven years before their death “are not really paying much of the tax at all.”373 Rory Meakin from the TaxPayers’ Alliance suggested that Inheritance Tax was “phenomenally unpopular” because most families view it as a tax in the middle that gets in the way of transfers between generations.374 Warwick Lightfoot told us that the complexity of the current Inheritance Tax system meant many individuals face a bureaucratic burden to comply with the Inheritance Tax system even if they are not actually liable to pay it.375

270.An alternative approach to taxing the transfer of resources between generations is to have a capital receipts tax where gifts and inheritances are taxed as income received by the inheritor or giftee. This was the approach favoured by Lord Willetts376 and Carys Roberts.377 Carys Roberts told us that the advantage of this system would be that it “cannot be avoided through those arbitrary means any more.” She also suggested it would incentivise breaking up inheritances to be given to younger generations as the more inheritors there are, the less tax would be paid on the inheritance.378 Warwick Lightfoot told us that the problem with this type of tax is that it would require a large amount of record keeping from individuals who would have to record the gifts they receive across their lifetime. He also suggested that this, as with Inheritance Tax, could affect people’s incentive to earn, as one of the reasons people work hard is to leave money to their children.379

271.Another alternative approach was put forward in a report commissioned by the Building Societies Association.380 It suggested that funding that was left for the specific reason of becoming a deposit on a home for a younger generation could be exempt from Inheritance Tax. However, this sort of idea, if not carefully implemented, may make the housing crisis worse. The House of Lords Economic Affairs Committee’s inquiry into the housing market found that tax exemptions aimed at property increased prices by incentivising investment in property. It recommended that taxes should not have special exemptions built in to prioritise property. There may however be a case for a carefully targeted relief which solely benefits those seeking a first home with the size of the relief capped to prevent exploitation. This could help address the present exceptional circumstances without incentivising additional investment in property for investment’s sake.

272.Inheritance Tax is capricious and not currently fit for purpose. Consideration needs to be given to whether and how assets should be taxed on death or transfer in a way that ensures fairness between generations.


307 The Household Representative Person (HRP) is the owner of the accommodation in which the household lives, the person legally responsible for that accommodation or if this responsibility is held jointly the individual with the highest income. If the accommodation is held jointly and incomes are equal then it is the older of the individuals who is the HRP.

308 John Hills, Good Times Bad Times: The Welfare myth of them and us, Revised edition, (Policy Press, 2017), p 49–51

309 As discussed in Chapter 2, the Households Below Average Income (HBAI) does not breakdown income by age of the Household Representative Person (HRP), so here we are using household type.

310 1996/97–1998/99

311 Department for Work and Pensions, ‘National Statistics Households below average income: 1994/95 to 2017/18’ (28 March 2019): https://www.gov.uk/government/statistics/households-below-average-income-199495-to-201718 [accessed 28 March 2019]

312 Q 105 (Frank Field MP)

313 Office for National Statistics, ‘Wealth in Great Britain Wave 5: 2014 to 2016’: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016 [accessed 28 January 2019]

314 House of Lords Economic Affairs Committee, ‘Social care funding in England inquiry’: https://www.parliament.uk/business/committees/committees-a-z/lords-select/economic-affairs-committee/inquiries/parliament-2017/social-care-funding-in-england/ [accessed 14 February 2019]

315 Written Evidence from Frank Field MP (IFP0060)

316 Work and Pensions Committee, Intergenerational fairness (Third Report, Session 2016–17, HC 59)

317 Q 105 (Frank Field MP)

318 Written evidence from TaxPayers’ Alliance (IFP0069)

319 HM Government, ‘Winter Fuel Payment’: https://www.gov.uk/winter-fuel-payment [accessed 29 January 2019]

320 Q 179 (Professor Sir John Hills)

321 Department for Business, Energy & Industrial Strategy, Annual Fuel Poverty Statistics Report, 2018 (2016 Data) (June 2018) p 53–61: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/719106/Fuel_Poverty_Statistics_Report_2018.pdf [accessed 29 January 2019]

322 Q 179 (Professor Sir John Hills)

323 Q 179 (Warwick Lightfoot)

324 TV Licensing, ‘TV Licence types and costs’: https://www.tvlicensing.co.uk/check-if-you-need-one/topics/tv-licence-types-and-costs-top2 [accessed 20 March 2019]

325 BBC, ‘BBC launches consultation on TV licences for older people’ (20 November 2018): https://www.bbc.co.uk/mediacentre/latestnews/2018/tv-licence-consultation [accessed 21 January 2019]

326 Q 179 (Rory Meakin)

327 Q 179 (Carys Roberts)

328 Q 106 (Frank Field MP)

329 Oral evidence taken before the Work and Pensions Committee, 2 March 2016 (Session 2016–17), Q 41 (Steve Webb)

330 Q 179 (Warwick Lightfoot)

331 Q 179 (Professor Sir John Hills)

332 Q 106 (Frank Field MP)

333 26 (Paul Johnson)

334 Q 178 (Professor Sir John Hills)

335 Q 229 (John Glen MP)

336 Q 178 (Professor Sir John Hills)

337 Q 178 (Warwick Lightfoot)

338 26 (Paul Johnson)

339 Q 178 (Warwick Lightfoot)

340 Q 168 (Caroline Abrahams)

341 Written evidence from Understanding Society, the UK Household Longitudinal Study (IFP0021)

342 Office for National Statistics, ‘Wealth in Great Britain Wave 5: 2014 to 2016’: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/wealthingreatbritainwave5/2014to2016 [accessed 28 January 2019]

343 OECD Data, ‘Tax on property’: https://data.oecd.org/tax/tax-on-property.htm [accessed 28 January 2019]

344 The US takes 4.179 per cent and the UK 4.186 per cent.

345 Budget 2018, p 96

346 Intergenerational Foundation, Home Affairs: Options for reforming property taxation (March 2018) p 17: https://www.resolutionfoundation.org/app/uploads/2018/03/Council-tax-IC.pdf [accessed 28 January 2019]

347 Q 30 (Paul Johnson)

348 Ibid.

349 Q 15 (Lord Willetts)

350 Q 180 (Professor Sir John Hills)

351 Q 180 (Rory Meakin)

352 Q 180 (Warwick Lightfoot)

353 Q 135 (Professor Christian Hilber)

354 Q 30 (Paul Johnson)

355 Q 15 (Lord Willetts)

356 Q 180 (Professor Sir John Hills)

357 Q 115 (Lord Forsyth of Drumlean)

358 Q 113 (Lord Forsyth of Drumlean)

359 Q 132 (Professor Christian Hilber)

360 Q 180 (Rory Meakin)

361 Q 180 (Carys Roberts)

362 Q 234 (John Glen MP)

363 156 (Paul Broadhead)

364 Q 234 (John Glen MP)

365 HM Government, ‘Inheritance Tax’: https://www.gov.uk/inheritance-tax [accessed 1 February 2019]

366 HM Government, ‘UK Stamp Tax statistics: totals and breakdowns of Stamp Taxes collected by HMRC’: https://www.gov.uk/government/statistics/uk-stamp-tax-statistics [accessed 29 January 2019]

367 Budget 2018, p 96

368 Intergenerational Commission, Passing On: Options for reforming inheritance taxation (May 2018) p 14: https://www.resolutionfoundation.org/app/uploads/2018/05/IC-inheritance-tax.pdf [accessed 29 January 2019]

369 Passing On: Options for reforming inheritance taxation, p 11–12

370 Office for National Statistics, ‘Intergenerational transfers: the distribution of inheritances, gifts and loans, Great Britain: 2014 to 2016’: https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/articles/intergenerationaltransfersthedistributionofinheritancesgiftsandloans/2018–10-30 [accessed 29 January 2019]

371 5 (Lord Willetts)

372 Q 181 (Carys Roberts)

373 5 (Lord Willetts)

374 Q 181 (Rory Meakin)

375 181 (Warwick Lightfoot)

376 Q 5 (Lord Willetts)

377 181 (Carys Roberts)

378 Ibid.

379 Q 181 (Warwick Lightfoot)

380 Building Societies Association, Intergenerational mortgages: Building on the Bank of Mum and Dad (November 2018) p 50: https://www.bsa.org.uk/BSA/files/da/da1a7288–7755-43db-9a5d-69687ef84416.pdf [accessed 29 January 2019]




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