Inflation-busting house price growth over the past 20 years has delivered an unearned, unequal and untaxed £3 trillion capital gains windfall in Britain, with those aged 60 and over the biggest winners from this one-off ‘property lottery’, according to new Resolution Foundation research published today (Thursday).
The report Home county – in partnership with abrdn Financial Fairness Trust – examines the scale of rising property wealth across Britain, who has gained most from it, what the consequences are, and why these gains should be part of the debate on how to raise tax revenues.
The report notes that 86 per cent above inflation house price growth over the past 20 years has delivered capital gains on home owners’ main residences worth £3 trillion, now represents a fifth of all wealth in Britain today. With rising prices having been driven primarily by falling interest rates, which are now at historic lows, this huge capital gains boom is likely to represent a one-off windfall.
However, this Great British wealth windfall has not been evenly distributed, benefitting existing home-owners, and particularly those who were fortunate to buy in the late 1990s and early 2000s.
The least wealthy third of households have gained less than £1,000 per adult on average, compared to an average gain of £174,000 for the wealthiest ten per cent.
Those aged 60+ have seen the biggest windfalls – at around £80,000 on average – compared to an average of less than £20,000 for those under 40 years of age.
Gains have been largest in London, where on average people have gained £76,000 since 2000, and smallest in the North East of England, with an average gain of just £21,000.
With rising house prices accounting for the vast majority of the overall rise in property wealth over the past 20 years – rather than a larger housing stock or home improvements – this £3 trillion wealth windfall has been largely unearned.
And as well as being unearned and unequal, the report notes that this Great British wealth windfall has been largely untaxed too – with primary residences exempt from capital gains tax (CGT), in contrast to other assets where capital gains attract tax rates of between 10 and 28 per cent.
With tax revenues as a share of the economy due to rise to its highest level since 1950 by the middle of the decade (amounting to an increase per household of around £3,000), the Foundation notes that these property wealth windfalls have been entirely absent from debates about how tax rises should take place.
While politically and administratively challenging, concrete ways of addressing this issue do exist. Not doing so also has real implications for household living standards, as taxes on earnings take centre stage.
Extending the scope of CGT to primary residences with a 28 per cent rate on all housing capital gains built up over the past 20 years could raise around £11 billion a year, with owners required to pay nothing until they exit home ownership or pass away.
Setting a £75,000 allowance would mean over half of estates don’t have to pay any tax, while still raising £4 billion a year. Alternatively, unearned capital gains on a primary residence could no longer be covered by the Inheritance Tax residence nil rate band, raising up to £3 billion.
The Foundation notes that continuing to put the burden of higher tax rises almost entirely on jobs and profits, rather than unearned wealth – as the Government is currently doing – will drag on people’s wages and incomes.
The revenue raised from these windfalls could also be used to make more progress on a major downside from this wealth windfall – falling home ownership among young people, who have been priced out of the property market.
Adam Corlett, Principal Economist at the Resolution Foundation, said:
“Inflation-busting house price growth over the past 20 years has delivered an unearned, unequal and untaxed Great British wealth windfall worth £3 trillion that makes up a full fifth of all wealth today. But not everyone has shared in these spoils, with older home-owners gaining over £80,000 on average, while the least wealthy third of households have gained less than £1,000.
“Choosing not to tax this huge housing wealth windfall because of the political and administrative challenges involved has real consequences, including higher taxes for workers and businesses.
“With the Government on course to raise taxes by an equivalent of £3,000 for every household in Britain by the middle of the decade, it’s time to reconsider a range of practical options for taxing these unearned windfall gains if we are to protect workers’ living standards in the years ahead.”
Mubin Haq, Chief Executive at abrdn Financial Fairness Trust, said:
“Upcoming tax increases are going to place the greatest burden on working people who are least able to pay and who are seeing their living standards squeezed. A fairer alternative would be to tax some of the staggering gains in wealth seen by home-owners, with those in the wealthiest top ten per cent seeing a rise of £174,000 per adult.
“Failure to address this issue increases inequality and injustice, loading the system in favour of those who are the wealthiest. We need to build back better but that means everyone contributing at the right level.”