187. Is It Time To Impose Capital Taxes On Our Homes?

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2:29stuff. If we do not get the economy growing again, then the entire property wealth of the United Kingdom will drop. How about you're only allowed to pass it down one generation? I love that. Welcome to The Rest is Money with me, Robert Paston. And me, Steph McGovern. And we have a guest with us today, Tom Tungenthat, who is a Tory MP and former security minister, of course, was a senior member of the Tory party cabinet when they were in power. Also spent quite a long time in the military serving in Afghanistan and Iraq, so has a really interesting background, not just politically, but also throughout his career as well.

3:09But he has particular thoughts, doesn't he, Robert, on investment in British businesses and what we need to do to get it moving and getting growing, something we talk about a lot on this podcast. Yes, that's right. I mean, it's interesting that he's broken cover on how he thinks the tax system may need to change if we're going to get the growth rate up again. He's been working actually with somebody who we've had on this show, Michael Tory, the investment banker, who has been absolutely obsessed with how successive governments have undermined risk taking by our huge pension fund. So an interesting chat coming up with Tom, who was a candidate in the last leadership election for the Conservative Party, and definitely still harbours ambitions to lead the Tory party.

4:04So, you know, I think this is, you know, could be really quite an interesting conversation. Yes. So here's our interview with Tom Tugendhat now. Tom, great to see you. And you've been working with a previous guest on this podcast, Michael Tory, investment banker, who's obsessed with why UK pension farms, UK financial institutions don't invest enough in the UK. And he's been doing a lot of work over a period of years relating this to our growth, productivity, income problem, the fact that effectively we've had flatlining living standards for 15 odd years. You've written a piece for the FT about all of this.

4:49Just talk us through how you see this problem. Yeah, look, this is much more than pensions. And what Michael and I have been working on is not just the problem of pensions, but the problem of capital misallocation, effectively. What you've seen over the last 30 or so years is you've seen an increasing amount of capital being frozen in different ways, but frozen and taken out of living economy, if you like. So instead of seeing businesses grow, instead of seeing people hired, instead of seeing ideas supported, you're seeing a lot of that money either going abroad or being frozen into sort of bricks and mortar.

5:29And what that means is that you then see consequences of it and you see foreign capital coming in. Now, there's nothing wrong with foreign capital, except, of course, for the fact that it then tends to draw the next generation of profit, the next generation of success overseas. And you see this rather more radically when you see the amount of share issuances that go almost immediately to New York now with fewer and fewer coming to London. You also think, Tom, don't you, that a lot of the money is going to the baby boomers. So it's not just that it's leaving the country, but also when it does stay here, it's the older generation who are benefiting here and not the younger.

6:07Well, it's actually everybody's losing out is the honest answer, because the older generation are losing out because their pensions aren't growing enough. Because actually what's happened is young people's energy and ideas is going overseas and young people aren't benefiting because actually the capital isn't reflowing. So in one particular example, in housing, you can definitely see that the boomer generation has benefited. But actually, across the whole of the economy, what you've seen is everybody suffering. And that's a real error. Now, what Michael and I are trying to do is to say, how the hell do you get the blood flowing in the body again?

6:44How do you get life restarting in this economy again? And it's not by taxing more, it's not by freezing more, it's by liberating more, and it's by making sure that you get that capital going. That's why Michael started off talking about pensions. I'm talking here about housing, but both of them come together, which is frankly, how do you get capital flowing? So on Michael's analysis, the increase in housing wealth now accounts for over 70%, almost three quarters of the total change in Yuko household wealth over the past three decades. The contrast is between a low growth economy, as the UK has been for the last 15 years, and the much higher growing American economy, where more or less the opposite is true.

7:37Two thirds of the increase in American household wealth was not the value of their homes going up. It was actually their investment in shares, in effectively investments in the private sector, in financial assets. We are way too dependent as a nation on our essentially savings locked up in our houses. What on earth do we do about that? that's where you know we've got to have a really honest conversation about this because you're completely right i mean this isn't the first time it's happened by the way the first time it happened was in the late 13th century we're taking the long we're taking the long view the long view the late 13th century so talk us through because you know we've got listeners who are who are brainy people talk us talk us through what happened in the in the late 13th century well in in the 1270s um the asset class of England, and it was in those days England, of course, was almost entirely tied up in land.

8:36A lot of the land came under the holding of the church, so it didn't reflow, if you see the church didn't die, the bishopric, the monastery didn't sell. So what happened was effectively got more and more frozen wealth. And at a certain point, the frozen wealth of England effectively froze the economy. And the king passed what was called, King Edward passed what was called the statutes of Mortmain to lift the dead hand, the dead hand of the church off the land of England and to liberate the capital flow again. And that led to a massive economic boom that lasted really until the 1450s. So what we're trying to do here, the reason I'm interested in this here is because what I'm seeing is we're seeing effectively like a new dead hand, but this time of us, of all of us, by the way, I'm not blaming any particular group, but it's all of us who have become worshippers in the cult of property.

9:29And what we've done is we've frozen so much of our asset class that actually it's just not flowing around the body. And this is a fundamental problem for any economy, that if you don't have blood, it won't grow. There's a mindset problem, though, as well, Tom, because, you know, as someone who, when I was growing up and left school, you were told, and this was like the late 90s, early 2000s, you were told, like, getting a house is the thing that, you know, you should really strive for. You should get a house and that is a solid investment. And as we've talked about a lot on this podcast, anything else is seen as a risky investment of your money.

10:05You see a house as something solid, it's tangible, it increases in value. And yet you see stocks and shares and things like that as risky and you might lose your money. And yet, you know, again, if we looked at how well stocks and shares have done over the same time of housing, they've also gone up much more than cash savings. And there'll be some people who've, you know, will have made more in stocks and shares than they have on the house price. And so there's a mindset problem here, isn't there as well? It's not just a policy thing. It's about how people think about their money. I agree with you that there is a mindset problem, but I'd argue that it's the policy that has shaped the mindset.

10:41Now, you know, when, forgive me, Steph, I'm going to be very rude. I hope I'm not being too rude and saying we're roughly the same age. When we were first buying houses. The question then was in the late 90s, you know, about getting a foot on the housing ladder. It wasn't get rich quick scheme, but it was certainly about sort of making sure you had a stake in your community, you had somewhere to sepal, somewhere to bring up a family. And, you know, those are perfectly reasonable. In fact, those are correct things to do. What's happened since then is that actually the punishment, if you like, the dissuasive effects of policy on investments and equities because of the changes in the way pensions have been governed.

11:22And this is to Michael's point, Rob, that you've already cited. What's happened is that the promotion, as it were, of housing has meant that housing has accelerated. And it's become, you know, for most people, very understandably, it's become the only investment class. Now, that's really unhealthy for all of us, right? It costs young people, because it means there isn't the money to start the businesses or to hire people or to try out new innovations. It costs older people because it means their pensions aren't growing at the rate of energy and imagination. Instead, they're growing, as it were, at the rate of the average of the country, which is much slower.

12:02And so what we've ended up with is a really distorted economy. Now, what I'm trying to do is to make the argument that undistorts it. Now, I know it's not going to with everyone. I get that. But the reality is we've got a very, very distorted economy because of capital misallocation. And you can see the comparator, right? You just have to look across the Atlantic and you can see the comparator. But where you have that liberation, don't look at the United States, look at Canada. You've got a very, very different economy with much more growth. And that's not just because it's got a larger country or because it's got more migration or whatever it is, because the allocation of capital is different.

12:41One of the contributors to this is the nature of our tax system. And I noticed that in your article as a CDM of the Tory party, a recent candidate to be leading the Tory party, what you say is we've got to have a debate around all this. You haven't quite nailed your colours to the fact that when any of us sell our principal residence, we should pay capital gains tax on that. And I completely understand why you feel challenged in making that case explicitly, because... Let me explain why. Let's come back to it in a minute, but I just want to make the obvious point, that it's very difficult for me to conceive of any party leader being courageous enough to say that the sale of people's homes should be taxed, because most of them are going to think that is the absolute fast route to electoral oblivion.

13:35Well, look, I'm not speaking for the Conservative Party. I'm not speaking for anybody else. I'm just speaking for myself. So the reason I've chosen to make these points now is because I can tell you the blunt truth. And if you choose to support it, that's great. And if you don't, it's up to you. But I'm just going to tell you what I think. And I don't want to tax people more. So the reason I don't quite go down the same line as Michael, is because I actually want to reduce taxes. So what I'd rather see happening is I'd rather see the alignment between capital gains put across houses and equities.

14:13And so what I'd much rather see is that you have a lifetime capital gains exemption of several, you know, a million, two million pounds that allows you to invest in various different ways. Because if you were to do that, if you were to have an exemption that allows that alignment across asset classes, then you wouldn't see this distortive effect. What you would see is you'd see people able to invest in property or able to invest in businesses or whatever it happens to be, and getting the benefit accordingly. But be real about this, Tom. People are obsessed with property ownership. Do you genuinely believe that if you had, on your model, a two or three million pound exemption for any asset that you invest in, that you would see a genuine shift away from housing investment into stocks and shares or investments of other sorts in real businesses?

15:12Not on its own, Rod, no. But that's why you've got to look at pension reform. You've got to look at other things as well, because what you would see is you'd see a greater weighting towards stocks and shares if you also change the requirement on gilts, which, as you know, is something else I refer to in the FTPs. because you've got to change this move that we've had over the last 20, 30 years into sort of dead money and put it back into live money. Now, dead money is a bit harsh. I accept that. But the truth is that money stuck into the nation's mattress in the terms of guilt or into the nation's bricks is not creating jobs.

15:52And what we need to do, the only way to get out of our debt crisis in the moment is to get growth. We all know that. I actually agree with you and disagree with Robert in this about this property obsession. You don't know what my view is. I haven't expressed a view, actually, so you can't disagree with me. No, you've said that property obsession. And I think in the older generation, there's a property obsession. I think there's a lot of young people who do not have an obsession about owning a property. And they can't. And they can't, even if they did want to. Well, I hope you're right. But there's a financial literacy problem here which is much bigger than the if you change the tax system it's got to come with an understanding of what your taxes and you know what the incentives are for stocks and shares and things because people don't understand it look i completely agree with you and one of the things that that is really striking in in in the age change as it were is is you see young people now not only don't have the same obsession with property for exactly the reason that you state which is they don't have an opening into the property market.

16:55Secondly, they don't have an obsession with lifetime work in the same way because they don't believe that they're going to be in the same job for 40, 50 years. And third, they have a very different view of pensions. I mean, I don't know anybody under the age of 40 who believes that the government pension is going to be there by the time they retire anyway. I mean, you know, now maybe they're right, maybe they're old, but, you know, I certainly won't be in government by that point. But, The reality is that there's a lot of people who simply don't believe in that future. And what they do believe in is their own talents and their own imagination, their own ability to create.

17:28And so you've got a very different generation. You've got a really creative generation who can help with things, but they don't have the capital to do it. So the challenge for us is not to say, oh, well, Britain is doomed because, first of all, I don't believe that. But secondly, to see how the hell can you get Britain to grow again? We've got some of the greatest universities, some of the most management people, some of the most dynamic businesses start here. The moment they get to a whatever it is, five, 10, 50 million pound valuation, off they go to NASDAQ and we lose the benefit. Tom, there's tons more we need to discuss.

18:00Don't go away. We'll be back in a minute or two. so i am now gonna say what my view is on on all of this and it is that i think there should be a land tax because you can't shift land abroad you can't dodge it i would use those proceeds to bring down income taxes whether it's income taxes on companies or income taxes on on individuals I would introduce capital gains tax on all property sales, including residential properties, but it would not be an immediate cash liability. You would accrue the liability and then it would just be deducted from your estate when it gets passed on to your heirs. So that for those people who are cash poor, you know, effectively, the burden would be shouldered after your death by the people who inherit from you.

18:55And there'll be lots of people screaming, oh, that's, you know, whenever people talk about putting up inheritance tax, people get incredibly upset. But, you know, the fact of the matter is there is this massive wealth transfer going on because of this extraordinarily inflated rise in the price of property, all held essentially by the boomer generation. Big hello from me. You're right. One aspect of the lack of dynamism is that it's harder than it should be for young people to set up growing wealth creating businesses. But equally, it is deeply unfair that the children of people who are lucky enough to have parents like me who did get on the housing ladder at the right time.

19:36You know, it is completely unfair that those kids have that degree of wealth advantage over those less fortunate. And to add to that, there's massive regional inequality there as well, because, you know, and I've said this before on the show, I bought a house in my early 20s in Middlesbrough because I felt I had to get on the housing ladder. I couldn't live in Middlesbrough because I couldn't get a job there. So I move away. I have this house in Middlesbrough. I had it for 23 years, Tom, and I sold it for the price I bought it. This is exactly the point I'm trying to make. I'm not with Rob that this should be some sort of ability to tax everything all the way through.

20:18What I am with you on, though, is that you need to have taxes that recognise the alignment of interests here. So why is it that if you were to have bought a flat in, I don't know, Pimlico or something, that would have profited you and taxed you less than had you started a business in Middlesbrough? Now, effectively, what that's doing, it's treating the bricks in Pimlico like a sacred cow and the labour in Middlesbrough like a cash cow. You know, this isn't the right way to think about it, because what we need to be talking about is how do you create jobs, how do you create opportunity, and how do you develop an economy?

20:54Now, I'd also rather like to see inheritance hacks come down on everything, frankly, because I think increasing the ability of people to pass on assets and understand a generational wealth transfer, I think, is important to people saving for the long future. I get your point, Rob, but I think that's where if you have an alignment of property... You're just arguing for, you know, broadly, even worse inequalities. No, I'm not. You are. because there is this massive unprecedented transfer of wealth going on between the older generation and their children. I mean, it is off the charts, the scale of this stuff.

21:33You know, the other aspect of this that is going to get corrected if we don't do this properly, frankly, is if we do not get the economy growing again, if we do not get the blood of capital flowing through the economy again, then the entire property wealth of the United will drop for the simple reason that we won't be an attractive economy. So, you know, we've got to make sure that we are actually doing all the sort of things that support our future sustainability as well. When I've talked about inheritance tax before, and I did this recently on a radio interview and then got like, I've never had so many comments on something in all my life, because I was suggesting that you should get to a point, maybe like after a generation where you can't pass down your wealth anymore.

22:14Because also one of the biggest problems is these like, you know legacy inheritance of like you know land and property and money from years gone by because everyone was moaning at me going i don't want to work hard and not to be able to give to my kids but the where the real unfairness comes is when you've just got these generations and generations of people who are passing down all this land and money and wealth so how about you're only allowed to pass it down one generation i love that i'm not i'm not getting into this That's so funny. So you hate the aristocracy, Steph. Is that basically what you're saying?

22:49I'm just saying we should spread the wealth. I'm not saying they can't still do well for themselves in the time. Poor old King Charles. You know, he's listening to you and he's thinking Steph is leading the charge to, you know, basically destroy the monarchy. Yeah, I'm thinking long term, not short term election gain. That's why I'm thinking of the longer term for the nation, Tom. I think there's a huge opportunity to get cash flowing again. And at which point, by the way, if you do this right, then what you get is you get growing businesses. And it means that the relative value of land means less.

23:22And so other people's earnings grow and other things. You can see this, by the way, in the United States today. I'm just look at the comparison in wealth between the US today and the US 40 years ago and the UK today and the UK 40 years ago. You know, we are now poorer than almost every state in the union. I think we've just become poorer than Mississippi. I may have got my stats wrong on that, but it's pretty close. As I understand it, per capita GDP in the UK is now lower than the poorest American state. So, look, we've said on this podcast many times that it is pernicious that regulation effectively forced our final salary pension schemes to divert vast amounts of their cash into lending to the government, into gilts and away from productive investment.

24:10The thing that the Treasury is terrified of in changing the regulatory structure such that pension funds, for example, would have a massive incentive to invest way less in government debt is, of course, they're terrified that the cost of borrowing for the government with less demand for their debt for gilts would go up and they would get into some kind of death spiral. or the interest bill for the government is already egregious. The last thing as a nation any chancellor or prospective chancellor wants to take on board is the idea that that interest burden will be even bigger. Of course, that's right, Rob.

24:51But the reality is that the direction that was set really in the late 90s mentioned that instead of being able to tax businesses that grew and people that worked and folk who bought stuff at a reasonable level, we effectively compelled them to lend us their money. That's effectively what we did from their savings. Now, you get the money quicker, but it's a bit like killing the golden goose. Just wait for the goose to lay the eggs. Because effectively, what we've done over the last 30 years is we have forced that money into government debt, rather than allowing it to grow an economy and taxing at a reasonable level.

25:31It was a catastrophic policy error, forcing our pension funds to divert their cash flow from productive investment in businesses into lending to the government. That was a catastrophic policy error. But we are where we are, is my point. And the question is, how do you manage the transition? Watch this space. I'll be coming out with a few more articles. But one of the things we've got to do is we've got to get pension funds into larger volumes. So we've got far too many small pension funds, which is hugely profitable for those who manage the pension funds, but very unprofitable for those whose pensions are in them and very bad for the economy.

26:10And it is true that if you get economies of scale, a bit of cash flow is freed up. But nonetheless, it doesn't change. This government, for example, in my view, is being deeply naive in thinking that if it forces through a number of mergers, this will automatically lead to much more investment in risk assets. And that is naive. That's not going to happen, absent other kinds of regulatory change. But it is also true that if you look at the way that the incentives seem to have been done, the idea that you're going to take, let's say, four or five hundred million pound pension pot and tell them to spend five percent or so on high risk investments or startups or whatever it is.

26:46You know, the amount of money you're talking about there is so low, you're not going to be able to get that adequately dispersed. It's not going to work. You need to have much larger pools of capital before that works. And do you think, therefore, there should be some type of limit to how much can be invested abroad as well? Like, do we need to force pension funds to invest in UK businesses part of this? Or give them, rather than force, which feels wrong, but give some type of tax incentive for investing the money in British businesses rather than just going for the ones that have, as we've seen historically, had higher returns?

27:20So look, I'm very against forcing people to do things. I am culturally a conservative in every sense. But I do think that there are areas where what we have done is we've actually dissuaded people from investing in the UK. Now, we've mentioned a few. And one of the things that means is that if you look at pension funds, I think it's about 1 % is now invested in the FTSE. I mean, it's tiny amounts. I mean, it's really, really small amounts. And if you look at the growth of the FTSE over the last, I'm going to get the time frame wrong, but certainly over the last decade or so, if you knock out dividends, you know, the returns are very, very low.