Capital Gains Tax reform could wreak huge damage on housing market

There’s a warning this morning that possible tax reforms to be unveiled next Monday could wreak huge damage on the property market.

Next Monday has been flagged up as Tax Day by the government - when the Treasury unveils proposals for longer-term reform, triggering the start of some months of debate over possible changes to the likes of Capital Gains Tax, Stamp Duty and Council Tax.

Jesse Norman, financial secretary to the Treasury, has already tipped off MPs in a letter that: “The goal of making these announcements separately to the Budget, but still all on a single day, is to give a range of important but less high profile measures greater visibility among, and opportunity for scrutiny by, parliamentary colleagues, tax professionals and other stakeholders.” 

It is thought the exercise is the starting gun for the government’s 10-year tax administration strategy, aiming to transform the country’s fiscal system and remove inconsistencies.

Now one London agency, Benham and Reeves, has crunched numbers on what one specific tax reform could mean to owners of holiday homes or investment properties - and it is not good news. 

The agency says the typical landlord or holiday home owner could lose as much as £24,000 if the government increases Capital Gains Tax as has been suggested in recommendations by the Office of Tax Simplification. 

CGT is tax paid on the profit of the sale of any additional home - a buy to let or a holiday cottage, for example - and currently the rate of tax stands at 18 per cent for basic rate taxpayers and 28 per cent for those in the higher rate threshold. There is an annual allowance of an initial £12,300 on which no CGT would be paid. 

However, the Office of Tax Simplification has called for CGT to increase in line with income tax rates to 20 per cent at the basic rate and 40 per cent at the higher rate, while also lowering the initial amount exempt to just £2,000. 

The research from Benham and Reeves shows that in the last decade, the average UK house price has increased from £168,703 to £251,500, meaning the capital gain of a holiday home or a buy to let investment during that time sits at £82,798.

Based on this example - and when removing the personal allowance of £12,300 - selling in the current market and with the current level of taxation would see a lower rate taxpayer pay £12,690 in CGT, while a higher rate taxpayer would pay £19,739.

However, should these changes come into play, the tax owed would climb to £14,100 for a basic tax rate payer, while those in the higher threshold would see it increase to £28,199; a jump of £8,460.

The agency warns that London’s landlords would be worst hit and based on property price appreciation in the last decade, a hike in CGT would see basic rate taxpayers paying nearly £4,000 more when they come to sell, climbing by a huge £23,810 for those at the higher tax rate threshold.

Those paying a higher rate of tax in the South East and East of England could also see the cost of CGT owed on their investment climb by five figures, increasing by £13,206 and £12,958 respectively.

“The proposed changes from the Office of Tax Simplifications would act as nothing more than another nail in the coffin of the buy to let sector” warns Marc von Grundherr, director of Benham and Reeves.

“As it stands, landlords and second homeowners are already paying a substantial sum on their investment due to the increased value of bricks and mortar.  A further increase in capital gains rates is nothing more than a blatant attack on them, especially those in higher tax thresholds.

“The government seems intent on targeting landlords and second homeowners as the cause of the current housing crisis. The reality is, their failure to build enough homes is the driving cause and so perhaps this should be their area of focus.”