I posted this video on YouTube this morning:
The transcript is:
Why is there no capital gains tax charge on private houses in the UK? It's a question that's entirely fair to ask because we've all got so used to the fact that people who own their own homes don't pay capital gains tax when they sell them. We just think it's normal, but it is in fact a tax exemption and it is an incredibly costly exemption - the second most costly exemption in the entire UK tax system. In fact, costing in excess of £30 billion a year in the estimate of HM Revenue and Customs.
So, is it a good exemption? Does it achieve a useful outcome? Could we do something different?
Is it a good exemption? Well, yes, to an extent. Why do I say yes to an extent? Because we would have difficulties if we charged capital gains tax - that is the tax on the increase in the value of a person's home between the time that they bought it and the time that they sold it - every time they wish to move during their life, particularly if those moves were required, for example, by the need to change jobs. We don't want people to be stuck in a location because they can't afford to move because they can't pay the tax on selling one property before buying one in another location where their work is available. So, there is a real problem with charging capital gains tax on people's capital gains arising on the sale of their homes during their lives.
But, should we end up with a situation where, as a result, a lot of people - people of my sort of age, with my sort of hair colour - are sitting on a lot of private wealth based upon the fact that they bought their own homes when they were relatively young - which was easy when I was knocking around in my 20s - and now appear to be very wealthy through nothing that they ever earned but by the chance or fortune that they bought a house when they were young.
No, that is not fair. And it's not fair because it concentrates wealth in their hands and in the hands of the children who they can pass that wealth on to. So, we do need to tax this more than we are at present, which is by inheritance tax, which only falls on about 5 per cent of all estates in the UK?
We should be charging capital gains tax on every final disposal by a person or their spouse or their civil partner at the time that the last of those two ceases to use that property, whether that's either because they die, on the second death, or because they move into a nursing home or whatever else, or both of them quit the country and move abroad. Whatever the reason, on the last disposal of a property without there being a reinvestment, which if both are dead there couldn't be, then there should be capital gains tax charged on the whole of the lifetime gain that they've made.
That would be fair. It would collect serious amounts of tax. I reckon at least £10 billion a year at present, rising over time as more and more properties come within the scope of the charge.
And it would also put downward pressure on house prices - which would be good news - while also requiring that properties be sold, which would open up the market to more people who could come into it.
All in all, a win.
But we have to do such a change with care because we can't stop people moving during their lifetimes.
There is more on this in section 8.4 of the Taxing Wealth Report 2024.
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I’m not sure where you get your £10billion a year from in year one.
In rough numbers around 150,000 properties are disposed of each year following the death of the final owner. To get to £10 billion of income from that, you’d have to be looking at a tax charge of £65,000 on average, or a taxable gain of 65000/0.2 which is around £300k. I’m assuming that when people die they are typically back in the 20% tax range. And that’s not taking into account the allowances.
I think it’s rather unrealistic to expect houses to have gained in value by more than the average house price.
Anyway, the point is this: I’m sure my calculation which I’ve just done over breakfast won’t be the best one, and what I’m asking is can you share your own working to arrive at £10 billion minimum please.
How is £300k in the 20% band.
If CGT is charged at income tax rates as I suggest the 40% rate would apply
It’s really not hard to work out
The tax occurs on death through inheritance tax. Or do you think double taxation is fair? If so why not go the whole hog and have the state annex wealth at death so there is no inheritance passed on. That certainly satisfies your desire to reduce inequality.
If you had bothered to read what I wrote I would then take houses subject to this charge out of IHT.
But that was really too much for you, wasn’t it? I provided the link.
Looks like another deceased boxer trolling you, Richard
Hey ho….
I think this area is a minefield Richard.
There are already plenty of schemes out there like Equity release, part-house swaps to buy new houses, lifetime mortgages that become payable on death that seem to me to be scams designed to relieve otherwise relatively poor elderly home owners of their only asset in order to provide more rent-seeking opportunities for the rich.
Get any new scheme wrong or the rent-seekers find a loop-hole and you risk making things worse.
Even if you can find a safe, working, practical scheme at some point you may end up with a Tory government who will corrupt it.
I agree in principle. In practice I can see some fairness and record-keeping problems, particularly with those who may have moved multiple times or those who renovate using their own unpaid labour which then contributes to any uplift in value but cannot be set as a cost against the gain. But presumably the cost of improvements can offset the final bill, which would require people to keep receipts for many years and not lose them. And these costs would need to be index linked as well as the initial house purchase price.
A multiple mover may rack up substantial gains on each move then shortly before the final sale could downsize to something very modest which might show a very small, or no, gain and hence a small CGT bill. Or is each gain to be rolled up and carried forward, index linked, to the final disposal?
If there are no records an indexed gain can be estimated
Data is available from 1974 – likely covering all into their mid-70s now
It is not perfect – but it can be used as a substitute if necessary – allowing for previous downsizing
But not indexation of purchase values? Which other country proposes to tax its citizens on gains arising purely from inflation?
What’s the incentive for governments to control inflation, if this increases taxation?
Is there indexation on investment income? No.
Or earnings from work? No.
Or VAT? No?
So what is the special case for capital gains tax? A pound of profit is just that – and equal to any other pound when it comes to taxation.
I agree with Geejay about the problem with people putting their own unpaid labour into upgrading a property. My present house was in a very poor state when we bought it, and is now unrecognisable. Some of the upgrade we have done ourselves, some we have paid workmen to do. Some would come under the heading of normal maintenance, sorting all that out would be a nightmare. Also, you have not mentioned stamp duty. This is payable not by the seller, but the buyer of a property. As values have increased it is now a very substantial bill which is a real disincentive to moving, although usually rolled up into the new mortgage. It must be a quite a money earner for the treasury.
I do not see the problem. The gain turns your earnings from working on the property into a sum liable to tax in death. What is wrong with that? You did earn that value, after all.
I guess the only concern is that, because successive governments have failed to address the massive social care issue around the elderly, whacking CGT onto the sale of an elderly person’s home is going to seriously erode any funds that they have to pay for their care should they become sufficiently infirm or unwell as to require residential care. If the government actually did something around the provision of affordable care for the elderly then that might be ok, but as it is, the care home sector is a racket with typical monthly fees in excess of £5,000. If there is no family around with sufficient funds to meet the shortfall when funds run out, the local council is meant to step in but they are so squeezed financially that oft times they can’t afford to match the fees and the elderly person is forced to move, sometimes many miles away, to a cheaper facility that the council can afford. So the idea of CGT on the final sale of a home is a good idea, but, as with everything, it needs the government to pull its weight and do the right thing – something that it is apparent they are incapable of doing (as there record on failing to address social care illustrates).
But they will have the funds to do the right thing as a result of this….
How should lifetime gifts of primary houses to children be handled?
They are a final disposal under this idea
Having had a quick read, how do you propose to deal with Divorce/Relationship Breakdown?
I might suggest that every time a property is sold/transferred a charge payable to HMRC is added to the Land Registry entry to keep a running total
The history will be split in accordance with agreed ratios at the time of separation. This would become a routine aspect of settlements. But it would not be hard to trace – few people have that many properties or divorces.
Income from work is typically taxed when it is received / indexation would be fairly irrelevant.
Income from investments is typically taxed when it is received – indexation would be fairly irrelevant.
Gains from a property sale could be received 50 years or more after the original investment was made – indexation would be very relevant.
I can’t believe you can’t see difference.
It would have a massive adverse impact on social mobility – people would potentially be selling a property on which they’ve made a gain and hen not be able to afford to buy the same house to live in elsewhere.
It’s ridiculous.
This is absurd and utterly unrelated to the proposal.
The charge is suggested to only arisee on death of the second partner in a relationship owning a property.
So, there is never a need for another property when the charge is due
And it is deliberately designed to allow social mobility
What is abundantly clear is that you did not even watch the video
So your comment on indexation is also absurd because all your arguments fail as you are tackling something I have not said
Perfect trolling
If a gain has been made purely as a result of inflation, not because of any ‘real world’ genuine increase in value, then most people would agree that it is not fair to tax it.
That’s why this proposal won’t get any further than this blog.
But once again, you struggle to understand the different between people pointing out flaws in your proposals and ‘trolling’. You treat any comments that don’t praise your ideas as trolling…
Your logic is as usual impeccable. However politicians like winning election and I think this is a guaranteed vote loser.
You may be right – bit unless I put this forward I would not be seeking what I want to achieve – which is a fairer society in the UK. I will take the flak for that.
Most contributors to this blog are here largely because of the campaigns that you run and becaue of the stimulating insights which enagement with your thinking tends to generate among us. We – well certainly, I – also positively welcome your penchant for waking up each day “brimming with ideas on things to write”. And that also means some of us may have to let you know when we may think – as I do now – that you’ve come up with what looks like a stinker.
Your proposal for a CGT regime for every “final disposal” of a domestic property “without a reinvestment” is a nightmare scenario with extemely complex problems for its fair administration, given the hugely varied circumstances personal and financial/social with which it would have to deal – a notable selection of which at least five (at the time of my typing) otherwise clearly well-disposed commentators have already raised. Your answers, at the moment, are somewhat pat assertions that things would work and be a normal part of life. That’s not good enough – and you wouldn’t accept that from people with whose positions you disagreed.
As most people would see it, I would suggest, this would be like there being a kind of wealth tax, but one effectively aimed – mainly – at the large body of economically relatively ordinary folk rather than the massive accumulations of wealth garnered by the truly rich and the super rich. The social and economic distortions which have piled up in some locations – but by no means all – are the product, not mainly of family inhabitants of suburban semis being able to acquire/hang on to/pass on inflated property ‘values’, but by massive failures in housing policy and in the provision of social care. So it may seem to many – as it does rather to me – that you’ve gone chasing a big tax idea rather than aiming at the societal policies elsewhere that are urgently needing the kind of attention which the other contents of your Tax Report already show could easily be paid for.
Now…. I’m not the economist but I was once enough of a lawyer to be reeling at the shoals of problems for which this policy would be heading. You are the economist – and a rather specially good one – and I think you ought to go away and do a lot more thinking through on this proposal and its obvious problems, before pitching for it again.
Full disclosure – I or rather my heirs (since I’d be rather dead at that point) would be very little affected here and my home abroad is now worth less than I paid for it and have paid out on improving it i.e. making it ‘this century’ habitable.
OK, let’s simplfy it.
On death you have a share in property worth £200,000.
You first bought a property in 1982.
Estimate based on indices the cost of the property owned on death in 1982. Now tax the difference. That’s incredibly simple. Would that be better?
Or instead tax on every disposal?
But why allow this division in society that is massively concentrating wealth to continue?
I don’t have all the answers. I may not have suggested the best one, but what I have proposoed is really not administratively hard (frankly I can think of no situatiion that would be that difficult – including on separations, where CGT always has to be considered by divorce lawyers now). And an indexed alternative for those without data should be made available, capable of calculation in five minutes. What is the issue?
I think one of the issues here is the strangeness of it all. The Englishman’s home is his castle and his (sic) right to pass it to his heirs cannot be challenged. Some of the objections are, I think, based on that strangeness.
For example. Suppose someone bought a cheap house some many years ago for £20,000. Then spent £5,000 on installing central heating and effective insulation. They also spent £2,000 on carpets,furniture and fittings. After that investment they had a warm comfortable home they lived in for 40 years. When they passed on their home was worth £300,000.
The £2,000 they spent on carpets furniture and fittings is gone, has no effect on the value of the house and is ignored under Richard’s proposals. Why should the £5,000 spent on heating and insulation not also be ignored – they had the benefit of that investment – a warm and comfortable house for many years. Why should their heirs get that money back?
Many of the people reading this blog will have benefitted from inheriting a parent’s house. A large number of people have a much higher standard of living than they could have had without that inheritance. But another large number of people will never inherit a parent’s house, because they never owned one. That means they have no real chance of changing their position in society. No one is suggesting here people should not inherit, merely that the increased value of the property should be taxed, helping to redistribute wealth rather than concentrating it. It is harder than taxing, for example, a piece of artwork when it is sold, but it is not impossibly hard.
Thanks
And agreed
And – yes (I should have this made clear and please add this in if that is possible before you post my longer piece, Richard – mea culpa) – I have read the relevant part of the Taxing Wealth Report – and I think the life-story in your example illustrates a tiny corner of the potential problems by being so uncomplicatedly ‘straightforward’. It’s the ‘hard cases make bad law’ reflection which immediately sprang to mind on reading it.
So what example would you like me to provide?
And what would you prefer if we are to stop this absurd and costly tax abuse that is now deeply dividing our society? Would taxing gains on every disposal be better?
Seriously – I want to know what you think better, because not taxing property is dangerously dividing our society.
I don’t at all disagree that the area is relatively little taxed and that there should be a fairer way of dealing with how this ‘economic activity’ should contribute to/be regulated to manage overall economic benefit (which I’m learning from you and this blog is really what taxation is about). It seems to me that the essence of the problem, in terms of fairness, is not the ‘value’ (fluctuating and largely inflated) of the houses – a different problem and really inherent in any capitalist system – but that the economic activity of sale and purchase is handled ludicrously and inadequately. “Stamp Duty”! The very name tells one that it hasn’t been thought about properly for dozens of generations.
Why not aim at a proper and progressive tax on every sale/purchase? No fuzzy and long stuck ‘bands’ but a real sliding scale which could be tapered to very low levels – even negative(?) – to assist with starter purchasers and increasingly ratcheted up as ‘value’ increased… perhaps even including an extra surcharge level for excessive ‘valuations’ in relation to actual living space. (Now – that last sentence probably includes a couple of ‘radical’ notions, which illustrate why I’m not an economist, nor anything like.) However, aiming the taxation at the process each time would surely give substantial yields/controlling pressures on the activity and it would be relatively simple to manage and collect without requiring the kind of extensive and long running record keeping and burgeoning special cases etc. with which – to me – your proposal is rife.
And there is another thing. You rightly, I think, suggested in your Report that this was likely to be the least popular of your proposals – and I think that the reasons for that are not just financial. There is very little indeed in ordinary folks’ lives in which people are left with a feeling of autonomy and one remaining area is – even if illusory, beset as most ‘ownership’ is with mortgage costs/burdens – the ownership of their own place, their home. To turn that into a complex, life-long focus of record-keeping, relationship entangled bargaining, future calculation etc. looks like a psychological blow to a great deal of what feeling better about being at ease with their society might mean. I think that in these perhaps somewhat intangible, but important considerations – this is the wrong target, especially when there is, to me, clearly a better and more obviously fair alternative.
Now – you can swiftly demonstrate why – economically – I have got that all wrong!
There may be a blog on this in the morning Nigel
I am knackered tonight
Bless, Richard. Your stamina and drive are both legendary – but you are human after all! Hope replying to all this does not add too much to tomorrow’s load.
Richard,
What are your views on people setting up companies and paying themselves dividends to avoid NI etc. Is this on to list of things to be abolished so that all income is treated the same?
If not, why not?
Start here https://www.taxresearch.org.uk/Blog/2007/08/09/arctic-systems-moving-small-business-taxation-on-in-the-uk/
Can I point out that you are very often an experienced troll.
I blocked you after the last comment and you worked aroiund that. Only trolls do so.
Interesting debate and the fair solution is not self-evident. I can see the appeal of unlocking the wealth embedded in housing for the greater good of society. But the (sometimes astronomical gains) may be more the result of a highly artificial market partly created by government policy from the now deceased MIRAS, to the Right to Buy, (and sell on to Buy to Letters) to multi-million £ properties in London bought by foreigners/investors and left empty, to all the existing subsidies provided by government ostensibly to support certain classes of buyers, (including exemption from CGT), to the paucity of social housing and not forgetting the auction-style buying process where interested parties are encouraged to outbid each other at well over the asking price. (In Scotland if a sale goes to Closing Date it’s virtually a blind auction where prospective buyers submit sealed offers).
From certain viewpoints the housing market is an under-regulated wild-west free for all where some see a house as a pension, or an investment to be cashed in when downsizing while others just want a decent home to live in where they can raise a family, near to where they can find work and not be priced out of their local community by second home owners or urban settlers of a certain age looking for “quality of life”.
Can taxation help reform housing or do we need other measures to bring affordability down to a reasonable multiple of average income?
Re your last question, both is the answer