The FishTank

Back before the election I was watching a debate about funding for long-term care and I happened to be annoyed by hearing an unusually fatuous remark from Charles Kennedy. I didn’t have time to address the issue then, but I thought I’d bring it up now as the issue is still one of importance. What Charles Kennedy said was that the issue of funding for long-term care wouldn’t arise if we weren’t – as a nation – so obsessed with the ownership of property.

Just think about that statement for a moment. What Kennedy was saying was that the current position where we force people to sell their homes in order to pay for care wouldn’t exist if they didn’t own those homes in the first place. It’s rather like saying we wouldn’t have a problem with waiting lists for cancer patients if we didn’t bother treating people for cancer. It’s frankly nonsense and it’s typical of a kind of I’m alright Jack, pull up the ladder attitude that you see more amongst rich socialists than capitalists. It’s the same mentality that allows a grammar educated Labour minister to be opposed to the continuation of such schools, especially when their own children are either in private education or they have carefully short-circuited selection processes to get them into the best state schools.

It’s also of a piece with the continual narrative about the Conservative’s – currently moribund – policy on inheritance tax. Far from highlighting the people whose houses have skyrocketed in value more by accident than by design (the same people whose example forced a revision of the Lib Dem mansion tax) the New Labour spin machine highlighted only a few thousand people, all of whom are presumably at death’s door given the way the tax break was continually equated with plans to cut the deficit over the next parliament. Anyone who has done well in spite of New Labour is, it appears, to be censured rather than congratulated. Or even better poisoned and then taxed to fund the latest government fiscal bonfire. Thankfully we’ve had a change of government and this attitude is on the way out.

I am, admittedly, somewhat ambivalent about inheritance tax: I don’t think it’s healthy for one’s offspring to be loafing around waiting for one to die and hand them a fortune, but that doesn’t mean I think the State has a duty to take the money away for the good of said offspring. The truth, however, is that sending a signal to people that if they go through life as a wastrel they are more deserving by the State than someone who works hard and saves their money is the kind of thing that disincentivizes work and creates the welfare dependency culture that has been fostered in our country. In the end it costs less to allow people to keep their wealth than to pay for all the people who, seeing no prospect of wealth, decide to live on handouts.

I don’t propose to handle the long-term care issue here, although some of my conclusions may feed into that debate. For the care issue to be resolved we need first to know whether the current care provision is cost-effective or merely profiteering from emotionally vulnerable people. Should it really cost more to live in care than it does to live in the Savoy or to be kept in a top-security prison? I suspect not, but I don’t have the figures to prove my suspicions.

Property, however, is more easily argued from principle. There are, after all, only three very simple cases for people’s residential arrangements: private ownership, private rental or public rental. Often, when you see a politician or a pundit making mileage out of this country’s ‘obsession’ with property they appear to be favouring private rental. My instant thought is that they either own rental property or would like a system which favoured rich people like themselves who wished to do so. Because, for the tenant in rented accommodation, private rental is the worst of all worlds: continually under threat of increased rent, often unable to make those changes which make a home one’s own, subject to the whims of the landlord when it comes to maintenance. Usually when you start renting a property the rent will be fixed at a rate higher than the same property would cost to mortgage. This doesn’t change as the owner’s mortgage is paid off, either. Rents move up as the prices rise, with even established owners putting their rates up inline with the market. If this weren’t the case then a council house sold off in 1980 (when average houses cost about £23000) would have a rent of not much more than £220 a month now.

And it’s not just the absolute cost of the rent that’s the problem; if you move you can’t take the investment you’ve made in your first home and use it to get a better property at the same or lower cost; if you stay put you can’t guarantee that your rent will even remain the same in fixed terms as inflation gradually lowers its value in real terms; and if you are renting you will never reach the day when the payments cease and the home is finally yours.

Public rental has, of course, more measures to protect tenants against the whims of their landlords and the maintenance tends to be better, but over the years public rents have risen closer to private ones and it remains the case that you will pay rent for the whole of your life. A prudent housebuyer might be clear of their mortgage by the time they are fifty. A tenant may only receive help with their rent when they reach retirement – by which time even a discounted rent will be significantly higher than the mortgage on the same property. Clearly, if we are in an ageing nation (and I have some doubts about this) then it will be cheaper to keep our pensioners out of poverty if they have, themselves, paid for the roof over their heads. It will also be easier if they need long term care and can be cared for in the home to adapt the property to their needs – something that would be a legal minefield in a private rental.

When it comes to passing property on, I don’t think this should be actively discouraged, but I do think there is an opportunity here for the State to make life better for pensioners and reduce the pressure on housing whilst leaving the decision in the hands of the homeowner. Equity release – the process where a company pays a homeowner an income in order to receive their home when they die – is something that already exists in the private sector, but take-up is low – largely because pensioners fear they will die having received only a small fraction of the value of their home. If the State were to regulate the sector or at least clarify legislation such that agreements both guarantee the homeowner residency even after they have received the value of their home and render any value remaining at death a part of the estate this would allow the elderly a second income that would greatly benefit their later years, rather than having them gift the property to their children at an age when they should be at the peak of their earning capacity. In fact, if the State were to offer equity release schemes itself then these could be an easy route to replenishing the stock of social housing. Consider, if the State enters into an equity release agreement at the age of 65 and the homeowner lives to the age of 90, the State could – even on generous terms – receive the house at its value ten years before they receive it. With even moderate inflation of 3%, that could be 25% cheaper than an equivalent house at the time – a larger gain than even inheritance tax would return.

A few years back Vince Cable, the so-called sage of Twickenham, announced that we were sitting on a bubble of private debt, mostly – as I demonstrated at the time – consisting of mortgages. He was wrong, because even with the credit crunch and in spite of Gordon Brown’s limited assistance, home repossessions didn’t skyrocket and bankruptcies remained low. Home ownership is one of the unique features of the British economy, both a protection against the expenses of old age and a private investment scheme that lasts a lifetime. A government which creates the keys to unlock that investment will do much to benefit both the elderly homeowner and the State itself.

One Response to “Blessed Arthur Meek and the Death Tax”