I always thought that yesterday's suggestion that capital gains tax be charged on people's main residences would, first of all, be the most controversial suggestion that I would make in the Taxing Wealth Report 2024 series and would, simultaneously, be the least likely to be adopted.
As it turned out, although there was some support for the idea, there were also a lot of objections.
Initially, those focused upon the suggestion that people would need evidential support for expenditure claims going back over many years. I admit to having not anticipated this as a key issue. I am obviously better than average at keeping critical paperwork. Others are obviously not. In that case, alternatives that do not require that such records exist have to be considered. I suspect that would be quite straightforward, using index data. However, for the reasons I have noted in another blog this morning, I am not planning to work on this in the next week.
Other objections emerged later in the day to the idea that the tax might be universally applied. What seems likely is that there is an expectation that there should be a minimum tax-free gain that a person might enjoy, and that thereafter rates should be progressive. I am interested in suggestions as to what that tax-free amount should be. Any suggestions on the rising scale of rates would also be of interest.
Third, there were some objections on issues that I had already addressed in the note supporting this suggestion. In itself, that note is a brief summary of a complex proposal, but I think it's a little unfair to be criticised on issues that I had already addressed.
Fourth, there were suggestions of alternatives, most of which seem to focus on some form of land value taxation. However, in my opinion, that will provide no more, and most likely less, capacity to pay whilst being considerably more subjective with regard to valuations. That is precisely why I have rejected that tax.
Last, I do wonder if many of the expressed concerns, which related to the ability to meet costs in old age, might be addressed if additional tax charges were matched by a government commitment to meet the costs of care for the elderly when access to that care is very restricted for most people at present? Is there a trade-off to be made between paying a fairly predictable tax charge on the basis of the understanding that the government will cover the unpredictability of the cost of our old-age care? I am not suggesting explicit hypothecation, but I do think there is an aspect to a social contract in this, and wonder what people think?
I have been of the opinion that a capital gains tax charge on people's homes, payable primarily on death, has been a necessary part of our tax system for some time. The proposal was, for example, included in my book, The Joy of Tax. This suggestion is not, as a consequence, something that I have recently stumbled across. Nor is it one that I am going to back away from: sometimes unpopular ideas have to be aired. In this case, the Taxing Wealth Report 2024 would be incomplete if this issue was not addressed. However, throughout that series I have discussed the need for consultation, and I am more than willing to listen to those who put forward serious and well-founded objections to suggestions that I make. I will be doing so on this occasion, so answers to the above questions and suggestions for alternatives would be appreciated.
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I think that you have zoomed onto a really fundamental point here about wealth acquisition and retention – what drives it.
If all of us – regardless of income – feel that the State is withdrawing its support and quality of life guarantees, then fear starts to roam the country and personal means take on more importance.
So, you are absolutely right (I am interpreting BTW) that a State’s tax arrangements are a reciprocal thing and that both the State and the Individual are bound by debts/obligations to each other.
Tax is a (and always has been) a ‘something for something’ deal. A two way street.
This ‘two-way street’ though has been messed around with.
For too long, tax has been used (or rather tax reduction) as a political tool to get votes. At the same time we’ve had privatisation – just a means really to let the private sector to extend its profit motive under the false flags of ‘choice’ and ‘efficiency’ and ‘improvement’. And we’ve had non- tax income funding of services reduced – adding an extra layer of confusion/obfuscation to it all as we are told that tax pays for everything.
So we have a perfect storm of misinformation covering all this up.
But, you are right – if the tax system is to work and with our consent, the State has to learn to put its hand in its pocket again and reverse essentially what is Thatcherism and revert back its services in terms of comprehensiveness of cover and standards as aspired to in 1946.
No one likes a poor service and deserve better if they are paying out – even tax payers – who really have been abused by politicians and rent-seeking markets. It’s just that the morass that Neo-liberal market fundamentalism has created for us in the public sector and lies about tax in politics have just made this a hell of a lot harder to get to the truth and for tax payers to take on hardened positions as a result.
The fig leaf you are offering to your detractors is logical and relevant but most of all humane as you always are and I encourage them to grasp it.
It’s all down to realising that concept of a two way street, the something for something deal between citizen and State that has ALWAYS existed in human society – the likes of which scholars like Michael Hudson and David Graeber have revealed to us. Why?
Because that is good politics.
Because it is democracy (or as close as).
Because the alternative is what we are living now, and that an only get worse.
Thanks
First, I admire everything about this report – concept, covering a large but defined area of taxation, presentation – headlines but graspable detail, sufficient logical and evidential justification and now today’s particular request for engagement. You earn your cups of coffee and then some.
Empty rooms remain unused while there is a homes crisis amidst property abundance. Stamp duty discourages property transactions – downsizing. Can changes to that be factored in to this conversation?
Fifty years ago, Ivan Illich advocated ‘consumption maxima’ (Energy and equity’, Tools for Conviviality). Where is the right place to consider *limits* to wealth and the squandering of resources? Wealthy people, far more than poor, are destroying the human biosphere. Incentives, or disincentives are not nearly powerful enough.
Care for the elderly? Needs to be thought about, but I don’t want to yet, I’m only 83. People like me rely on others in society – on government. We can’t all think about everything.
Interesting points
Thank you
A tax free allowance on capital gains? Everyone should have the same total tax free allowance, whatever the source of the income. An additional tax free allowance for capital gains on a home flies in the face of logic – it means, yet again, that those who have more are taxed less.
Noted
Once I worked in the DWP, assessing claimants’ disposal of funds before they claimed means-tested benefits. No matter how it is carried out, the process always relies on an individual officer’s judgement / feeling / cynicism about expenditure. It could be a kitchen – refurbish or replace? – or a car – new or second-hand? – but it still comes down to one officer’s experience. And that comes with concomitant appeals. Hence, I did not support your post.
Never inclined to not propose an alternative when disagreeing with someone: Wouldn’t it be far better to capture CGT annually through (much) more frequent Council Tax assessments that can actually reflect the gains over time, and treat the home on death as part of the estate, with no exemptions, and with the value of any inheritance becoming part of the legatee’s unearned income – hopefully taxed at a rate equal to any earned income?
Finally, any suggestion, as from some commenters, that denies a social contract for the care of the elderly denies the equality of need and emphasises the absolute iniquity of the inequality of wealth to buy a human right. The wealthy who can buy education do not notice the poor opportunities in the state sector, the wealthy who can buy healthcare do not notice the dangerous state of the NHS. The wealthy who both buy elderly care and also do so because they don’t like the state provision, and don’t campaign loudly for improvement, are doubly guilty of inhumanity.
It’s nice to be out-radicalled, but what is the advantage of imposing an extra tax in life when there is no cash flow to pay for it?
Another issue with capturing unrealised capital gains every year is how you would capture the unrealised capital losses that may occur in other years. By the time you paid the tax on the capital gain you may already know that you are sitting on a capital loss.
Agreed
Poor expression of my thoughts…
Council Tax is levied on an assessment of a property’s value. I certainly looked at CT Banding when buying my property. So it’s a consideration, “How will I pay for it?”. The legislation as enacted should have had revaluations every x number of years. (11 is in my mind.) But they haven’t been undertaken. They haven’t even been revalued on each sale.
More frequent valuations would keep the CT linked to the value of the property. I didn’t intend to imply that the CT bill would be linked to the actual Capital Gain, but the rise in a property’s value would show in increased CT liability, thus an ongoing “tax” demand.
You ask about a tax demand when cash flow is insufficient. CT goes up each year already. What happens when the rise in CT is more than your cash flow?
Accepted
But also why it needs reform
I don’t have any problem with the underlying principle that once a house ceases to be its owner’s primary residence (at death of the owner if not before) the tax it was previously exempt from becomes payable. However I have a lot of problems with the political practicability of introducing such a tax; I simply can’t see it happening on any meaningful timescale.
It will probably be better to keep the principle in mind when suggesting how inheritance tax could be applied going forwards. IHT is also a political minefield, but there is general recognition that it flawed in its current form and needs reform. The problem is the public sense of unfairness in the way it operates has become (with the connivance of certain newspapers) a feeling it is unfair it exists at all. To improve it there would have to be trade-offs between what is ideal and what might be acceptable.
But my thanks for your hard work in making all these carefully thought through proposals, they make discussion of future taxation so much better informed.
Thanks
I doubt this one will happen
My aim is to show there are many options – and undoubtedly more than I will suggest
That creates a debate when there is none now
As discussed yesterday the problem with tax free capital gains on primary residences is that it creates and perpetuates inequality.
The main issue is the increasing price of houses that leads to the problem with such capital gains. In a sense the capital gain is merely a symptom, allbeit malignant, of the underlying problem of lack of housing. The obvious solution is to build more houses. The government, perhaps via local authorities, needs to do this; no commercial building company will ever build enough homes to cause a reduction in price.
But, I think, with capital gains tax were looking for an alternative way to keep the price down. Taxing the gain does this indirectly by preventing the recycling of those gains into housing by the next generation. So it is a solution, if we don’t make it retrospective. But not a direct one.
To reiterate from yesterday, perhaps we should tackle the issue more directly by taxing the sale value of houses (not land value). This is more direct than taxing capital gains, though perhaps we need to do that too.
My thinking is that by taxing sale value we inhibit the ever upward price of houses. This perhaps has a more immediate affect than taxing the capital gain. Over time the need for capital gain tax on houses may abate if prices don’t rise so fast.
For example, if we’re were to tax the sale value of houses greater than £300k (more or less average house price in the UK) at, say, 1% (ideally it would be progressive but here I just wanted a simple example). Then a £1million house would pay £7k per annum. If you live in a £1M house then you should, imo, be prepared to pay this tax or more.
The average length of ownership of a house is about 20 years so, over this period, a property value tax would be much more than stamp duty, which could therefore be abolished.
Since there would be an additional cost to home ownership a property tax would tend to depress prices, which is desirable. A more progressive rate would do this better than a fixed rate above a threshold.
I probably haven’t suggested the best rate of tax.
Of course, some owners would find the sudden imposition of such a tax a serious problem. I think the tax itself is reasonable, but if you have a low income you can’t magic money out of thin air (only the BoE can do that 😉 ). Which is why I suggest there should be the option to role up the tax as a charge on the property when it is sold.
In practice this is simple to implement. It is, usually, easy to know the value of a home.
And we know it can be done as it happens in other jurisdictions.
I share with you Richard, the need to address the problem of windfall gains on property, and the inequality it engenders. Like you, I have been pondering this for decades. And a property value tax it the best I have come up with, perhaps combined with a modest capital gains tax on current primary residences.
Perhaps this does not directly address your objective of simple modification to the existing tax system, because it involves a new tax. But I hope it is a useful contribution to the discussion. Thanks for providing a forum for discussion and the opportunity to do so.
Tim
As I discuss in my note, the reason why sales are not taxed is that this prevents mobility and I agree that this is undesirable.
Richard
My thoughts are that the first port of call when raising revenue is on surpluses (income or wealth) which usually arise through extraction or through luck (asset inflation, inheritance). This is both for reasons of basic fairness and, unlike earned Income taxes, do not disincentivise work .
I would prefer that the PPR CGT exemption be totally removed but a “roll over relief” introduced. The tax due on the gain would only be due when the owner downsized, in other words, when they have the funds to pay it!
That is how the scheme I propose would work
Why should people get taxed on inflation? After all Inflation isn’t a gain in wealth in real terms.
But it creates a welth differential that is massively destructive of the overall wellbeing of our society
Jason
“Why should people get taxed on inflation? After all Inflation isn’t a gain in wealth in real terms. ”
Every worker is taxed on inflation. When I started work I earned under £1,000 a year. When I received inflation increases every year (or even, memorably, every month in the mid-70’s!) My tax went up by the same percentage. I wasn’t permanently taxed on my original income. It was slightly offset by the annual increase in tax free allowance, until the current government ended that annual change.
Spot on
In the US, a person can claim an exemption – the Section 121 exclusion – for capital gains realised on the sale of their main house (for at least 24 months in the previous 60) capped at $250k per person (double for a couple filing a joint return).
Rather than the UK’s uncapped total exemption, we could for example cap the exemption at £250k of gain per person. That seems pretty generous to me. We could even have a generous lifetime allowance of say £1m of gain per person.
For context, the median house price in the UK is about £300k. In London is is around £500k. There is a long tail so the mean is somewhat greater.
It may not raise that much revenue, but it really isn’t the point. Our present total exemption disproportionately benefits the already wealthy. Just like the marginal relief for pension contributions.
Thanks Andrew
I will be doing some modelling on this
But not next week
And the mean seems to be much higher…..
I personally think that a fixed amount of capital gain irrespective of length of ownership as used in the USA isn’t a good system. It would be far better if it was a smaller annual amount which could accumulate during the period of ownership and be used upon sale.
It doesn’t appear particularly equitable to create a system where moving more frequently washes out large gains whilst remaining in the same property doesn’t. Everybody knows the year they bought a house and when they sold it so it isn’t exactly difficult to work out what the amount should be. More to the point you arguably don’t even need to care what those dates are, as long as the allowance for each year is only used once.
What if someone dies with a loan outstanding on the property (mortgage or otherwise)? It would have to be deducted from the gain, would it not? And wouldn’t that create an incentive to take the maximum loan possible on the property and put the proceeds into trust, thereby avoiding most of the CGT on death? Maybe the solution would be for the CGT to arise when the loan is taken out?
The mortgage would represent a purchase cost and so a deduction would be given in that way
I agree with your proposal in principle. I reckon our liability would be pretty close to the final value of our present house (we have been owner/occupiers for 56years of various flats and houses). Maybe the CGT could simply be charged on the final sale price unless the history of sales and improvements was given. Of course this could be a good source of disputes.
I read your thoughts on CGT v IHT with interest and then with increasing panic as I thought about the implication from a personal point of view. I suspect others did the same which caused a lot of backlash on the original post. As you have so rightly identified a lot of this is to do with the lack of social contract and funding for potential care home fees. My grandmother spent her last few years in a very nice small care home funded entirely by the state, ( she had no property having been a council tenant all her adult life), my elderly mother will only be able to access that level of care by selling her flat and the funds from that won’t last long ( it has a short lease). I have consoled myself with the fact that I have a freehold property that will fund a decent care home for a reasonable length of time should I need that. While I don’t have a problem with the CGT idea in principle there has to be some sort of recompense in social care. Would the payout on that be more or less than the income from CGT on the sale of property? It’s an interesting question.
I think what this discussion has identified is a ncessary dialogue that mst exist when discussing wealth taxation
I am inclined to think that, if you believe capital gains should be taxed at income tax rates, then you might want to use a system whereby you divide the gain by the number of years it relates to, calculate the tax on that fraction of the gain as though it was income in the current year and then multiply it by the number of years to come to the final tax bill.
This would largely result in basic rate taxpayers paying capital gains tax at the basic rate, higher rate taxpayers paying at the higher rate and additional rate taxpayers paying at the additional rate. I believe it is similar to the system in use for various other products such as offshore bonds.
It isn’t a perfect system, but it is rather less ruthless than turning some basic rate taxpayers into higher or even additional rate taxpayers for the first time ever!
Why?
Cash rules in tax
Possibly naively idealist, but I like the idea of companies that will only pay CEO’s a maximum of a multiple of the lowest paid worker. I think I’ve heard of 7 times or 10 times the lowest salary.
Could we not have the same for tax allowance? The maximum allowance for anybody would be a multiple (3.5 or 4 times) the government mandated minimum wage. If they want more tax free allowances e then just increase the minimum wage!
The TUC adopted a policy that no tax deduction be given for any pay 10 times median wage in about 2010
I wrote the policy
I’ve been out with middle son (15) today so have had a while to think about it.
My first question might be that as you state that Capital Gains Tax is applied to house sales in the USA so how does it work there and what impacts does it have.
My next might be to suggest as a slight thread drift, if we are looking at a recurring property tax as a replacement for Council Tax I suggest that the obvious value to base it on is the purchase price and that this should be uprated each year in line with property price increases/decreases in the area. As everybody’s property value would change each year when the tax base was set this would then be reflected in the rate set by the precepting authorities.
Then there is the issue of ‘improvements’ If you do significant work on your home that involves building regs/planning consent. My suggestion might be that if a homeowner does work that beyond that required by basic maintenance that needs planning/building regs approval would be that rather than looking at the purchase and sale value to assess the tax liability instead the current sale price is then reduced by the change in house prices across the period of ownership.
Ie I buy a house for £100000 and sell it for £200000. I have a taxable gain of £100000. But I have extended the house. If the house price index has increased by 33% then the value of the house in its current form at the time of purchase is deemed to be £150000 which gives me a taxable gain of £50000.
Then I might ask what sort of targets are we setting for the way we manage the economy? My suggestion is that you want a low inflation economy with house prices rising roughly in line with inflation then taking any CGT at the time of sale would have the advantage of taking money out of the housing market and dampening inflation. It also has the advantage of simplicity.
Then there is the question of indexation. Given that we need somewhere to live and we dont want a situation where someone wants to move from one average price property to another but gets hit by a large tax bill because its been a long time since they last moved.
Finally there is the question of variable rates, housing costs are a vexed issue BUT clearly there is, I suggest a case for some sort of ‘mansion tax’ with I suggest a ‘less favourable’ rate for the highest value properties.
Anyway I hope I have managed to get some of my ideas over and am happy to discuss
Thanks
I have still not finished the Council Tax section and am not quite fixed on what it should be as yet…..
In principle, CGT exemption for your main residence is wrong. Indeed, if we were living in a tax regime where gains were taxed I doubt that there would be any move to abolish it (it is not a hot issue in the US, for example).
However, transition from “here to there” is difficult for many reasons already outlined in the comments; in addition, the political barriers are immense. So, far better to focus on the other recommendations you have made that are much more easily implementable.
There is still the issue of how to tax property (which DOES need tackling) but I feel it better tackled through “consumption” taxes (ie. Council tax reform) than through “transaction linked tax” (ie. CGT and Stamp Duty).
Clive
I tend to agree
But the report would be incomplete without this
Richard
I like the idea but surely it would be far to complicated to implement. I moved 5 times during my adult life and each time some funds have either been added or proceeds taken from the sale/purchase. I have spent money on improvements somertimes using tradespeople and sometimes diy. I now live in France but also own a flat in the UK and might return to the UK at some point in the future.
i am mystified as to how the tax authority would calculate the capital gain after I’ve died when all knowledge of the transactions (other than that recorded at the land registry) have probably died with me.
I think this suffers from the same issues you raised with a wealth tax. It’s just too complex.
I will be offering an alternative, soon
I think a political commitment to high-quality, free-at-point-of-use care would help to make this more palatable to some people. But perhaps not to enough people! Fundamentally, there is a conflict between a desire to pass wealth on to the next generation of one’s own family and a desire to reduce inequality and poverty. People need to come to terms with this.
The more tax, in whatever form, is levied when somebody dies leaving significant assets, of which their home is a major part, then the more likely the home will be sold, and therefore the lower house prices will be for those (the majority) who never benefit from any significant inheritance. (House prices are determined by supply and demand, of properties on the market, not of houses to live in and people who need to live in them. House prices being too high *doesn’t* necessarily imply we need to build more houses.)
Inheritance Tax is the one existing tax which does something like this. Capital Gains Tax should be able to do it more fairly. But the details are tricky.
I am a bit surprised about some of the details of your proposal. I agree that the idea of allowing rollover relief from one home to the next is essential. But apart from that key provision, I’d have thought that the aim should be to align tax on PPRs closely to tax on other assets. Which you’ve departed from by charging unrealized gains at death *only* on PPRs, not on other assets; and by exempting PPRs from IHT.
I do accept that some adjustment to IHT, in exchange for taxing unrealized gains at death, may well be appropriate. But I would do that by taxing unrealized gains on all kinds of assets at death (except for assets transferred to a spouse / civil partner, where instead the cost basis would be carried over, as you propose for PPRs), and simultaneously cutting the rate of IHT. The aim would of course remain to raise significantly more additional tax from CGT than is forgone on IHT.
Exempting PPRs from IHT seems problematic to me in that it would encourage people to upgrade to a more expensive property in later life to reduce IHT. You mentioned that an anti-avoidance rule could catch people buying expensive properties on their death bed, but it isn’t going to catch the less blatant cases.
How far back to go when taxing old gains? Since CGT generally has already been rebased start from March 1982 valuations, I can’t see a reason to go earlier than that for gains on PPRs. House prices were so much lower then that there is little to be gained from going earlier. Perhaps a slightly later date could be used. Apparently registration of properties became compulsory (when selling them) throughout England & Wales (I don’t know about Scotland or Northern Ireland) in December 1990; is that relevant for finding records of old transactions?
If unrealized capital gains were to be taxed at death (whether on PPRs or generally), then what tax rates should apply? As if they were the top slice of income is perhaps harsh when the gains may have been accumulated over a long time. How about the same rates but with band widths multiplied by a factor, such as 10? So if £1k gains are exempt per year, then £10k of unrealized gains at death are exempt. And if the basic rate band is £37,700, then the next £377k of unrealized gains at death are taxed at the basic rate. And so on.
Thanks for this
Sorry it has taken time to get to it
I did wonder whether to go down the CGT on death and abolish IHT route, but I am aiming for incremental changes not total reforms here and so did not
But you make a good point
Why not go back to the rates system we had before Thatcher?
It worked.
Local Government had a means of funding itself in order to efficiently fulfill its legal obligations, local services worked, payments reflected the value of your property and if you did not like it you had a regular opportunity to vote out the local politicians responsible.
Looking back I am amazed at how low the charges were for my small terraced house and yet the system worked.