I returned to the subject of capital gains tax on people's homes yesterday, knowing well that of all the proposals I made in the Taxing Wealth Report 2024, this was the one that proved least popular when I put it out in the first draft. Despite that, I felt it appropriate to include it in the final report and to raise the subject again.
The fundamental reason for doing so is that the capital gains tax exemption on people's homes is now creating enormous divisions within our society because of the massive wealth divide that home ownership is now creating in our country. This is being repeated amongst younger generations, depending upon their parent's good fortune. I see no way to overcome this growing division without the use of taxation, and inheritance tax captures far too few of these gains for it to have a meaningful impact.
The objections come in several forms. The first, not generally specified, but I feel implicit in some of the comments, is a distaste for this in general. I accept that others do not share my belief, but I think that a tax on these gains is now essential.
Some commentators objected because of the impact on social mobility. They had clearly neither read the report nor listened to the video that I have produced because the whole reason for making the charge I propose on either death or last use of a property by its owners is to avoid the impact on social mobility. The charge that I suggest would almost always arise on death, or in old age when the property was no longer needed, or on emigration. It would be very rare in other circumstances, but in any of these situations, the funds to make payment would be available without any impact on social mobility, meaning that this objection is not relevant.
Thereafter, the objections appear to very largely be on administrative grounds. I think these objections fall into two parts.
One is the suggestion that records of purchases and sales over life would not be available, and I recognise that this is plausible, although I would be very surprised if most people make so many purchases and sales of homes that they cannot recall what they bought and sold them for, whilst standard allowances for costs of transactions, including legal fees and stamp charges, could be made without difficulty to overcome that issue.
Alternatively, in the absolute absence of data, I propose the use of an index basis for taxation instead, with the value of a property finally disposed of being compared to the value of a similar property in the place in which it is located and in the share in which it is owned in the year that a property might have been first acquired by the person now making the disposal as a substitute basis evaluation. Again, if evidence of the number of moves that have taken place in the meantime without evidence of precise transaction costs having been made available could be provided, then a claim for appropriate estimated transaction costs might be added. Compared to most other taxation charges, this is, frankly, no big deal and well within the scope of normal taxation advisors to calculate, probably in a few minutes.
As for those who separate, capital gains taxes are almost invariably an issue addressed at this point because such a charge can arise on separation. There are also, invariably, agreements as to how property ownership and associated liabilities are to be shared. The likelihood is that in these situations records will exist, but again, in their absence, an index basis could provide an alternative to overcome any such difficulty.
Let me provide an example. Suppose X and Y buy a property for £100,000. Three years later, they sold it for £120,000 and bought another one for £150,000. They then separate a little while later. X agrees to pay Y £60,000 for the equity in the property. Y then buys a new property using those funds. So, X has, after this, an interest of £50,000 from the first property and an additional £15,000 (£150,000 new cost less £100,000 original cost, less £20,000 gain, all divided by two) from the second property. X then adds £60,000 to their base cost by buying out Y, giving a total base cost of £125,000 at that point.
Meanwhile, Y also had a base cost of £65,000 at separation. Presuming the £60,000 was all gain, this base cost is not changed by the disposal, and so long as they reinvest in a new property, no tax is due. Instead, they take the £65,000 and any difference between the £60,000 and the sum invested in a new property into their next property. So, if they spent £80,000 on the new property, their base cost would rise by £20,000 as £60,000 of that was rolled over gain. If they spent £40,000 extra on the new property they would reduce their base cost by £20,000 as this sum would not have been reinvested. This last point is important for downsizing. I cannot see the complication in this.
But whatever happens, no one would need to prepare documentation unless they thought they would get a better outcome than the indexation option would provide.
So, these points having been made, what are the remaining objections?
Or, alternatively, what are the better options?
Or are we simply to accept that this inequality should continue because politicians do not have the courage to address it, leaving us in a deeply divided society?
As a footnote, I had a look at the reactions on YouTube to this video. The majority of the videos that we are posting relating to tax are getting approval ratings of 99%. This one has not. Its approval rating is about 90%. That, of course, is not persuasive, nor does it necessarily represent the population as a whole, but it does suggest that there is an awareness of this issue and the need to address it, and I find that encouraging.
Comments are genuinely welcome, because I may not have put forward the best solution to this problem. I recognise that possibility. But, if I have failed, it does not mean that the problem goes away.
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Forget it, it’s an electoral impossibility for any Party. Far better to cut stamp duty to help people on the ladder. And of course to build more housing. Maybe to make second homes more “expensive” through tax or some other mechanism particularly those owned by foreign nationals where the house is not rented out and is left unoccupied for significant lengths of time. This is workable. What you propose simply isn’t and never will be.
Stamp duty never helps people onto the ladder
It just inflates property prices, helping no one at all
True about stamp duty, when it is cut, higher prices follow. I’ve read recently that the Tories are thinking of cutting this just before the election. Same old, same old from the Tories, and will probably make housing even less affordable.
According to reports in The Times, Mr Hunt is weighing up increasing the threshold at which homebuyers pay stamp duty from £250,000 to £300,000.
https://www.independent.co.uk/news/uk/politics/stamp-duty-cut-autumn-hunt-b2531840.html
I read this today, and was not sure where to put it, but this might be worth a separate discussion. It is astonishing if true, but tells us a lot about housing in the UK.
“The cause of high prices is the dominance of private landlords, of whom there are now 2.5 million – one in 21 of the population – receiving a combined £63bn per year in rent. They are supported by government policy, which allows them to turn tenants out without giving a reason, lightly regulates them and sometimes directs vast sums of money in their direction, out of the £23.4bn annual housing benefit bill.
Bano writes with passion of the horrors that follow, sharpened by his experiences representing the homeless and the badly housed in their legal cases.”
https://www.theguardian.com/books/2024/apr/23/against-landlords-by-nick-bano-review-valuable-ideas-for-how-to-solve-britains-housing-crisis
I think the above two stories show the priorities of Tories.
Yes I agree, no politician left or right is going to advocate CGT on primary residences, even if privately they’d like to. It would be electoral suicide. There must however be scope to increase taxes substantially on second (and third and fourth) homes and I’m sure such a move would be welcomed in areas such as Wales, Cornwall and Devon where local people on average incomes are effectively priced out of the market. Raising money this way could allow stamp duty, which is a tax on moving, to be abolished
I like that idea
But we cannot have tax justice without a tax on homes and inheritance tax already does that, of course.
Most people should be able to recall or recover the price they paid to buy their flat, house, etc. It is reported to the Land Registry, and many online providers report all the prices paid for all the properties on a street back many years. Legal and other costs (estate agents, stamp duty or SDLT, etc) may be more difficult to recall decades later, but a flat reasonable allowance – say 5% – could be an alternative.
I don’t see the rationale for allowing indexation of gains on homes but not in other cases. If the rates of CGT are aligned with marginal rates of income tax, I would reintroduce an indexation allowance. I know it is not perfect and there are counter arguments, but a lumpy gain realised over many years is not the same as income received year after year.
My suggestion for CGT on main residences is that we should adopt something similar to the US. A simple exemption – say £250,000 – which can be claimed say once every two years. That will exempt most gains on most modest properties but capture extraordinary or speculative gains. I am not wedded to the cap (could be higher or lower) or time period (could be longer, say once every three or five years). But I think in principle uncapped tax exemptions are problematic.
Similarly I think there is a rationale to cap APR and BPR for inheritance tax – say £1m or £2m of each should be enough, and then tax on any excess payable in instalments over say 10 years. But the quid pro quo would dropping the rate to say 20% (I think 40% of the value – not the gain – is far too much).
There will be winners and losers so I doubt any of this would be particularly popular.
I think a cap might be an answer here…
But I stress, might be
But I would not go as high as you are suggesting, and nor would I do indexation in that case
” I know it is not perfect and there are counter arguments, but a lumpy gain realised over many years is not the same as income received year after year. ”
I have said this before, and no-one ever gave a counter argument.
I started work in the mid-70’s on less than £1,000 per year. Very soon afterwards there was mega inflation and every month our salaries went up by a cost of living %. (I was a civil servant). My income tax also went up every month as it was a %.
No-one has ever suggested that I should not have paid additional tax on what was purely an inflation increase. Ever since then my earned income has increased every year,primarily because of inflation but also on promotioms or moving to a better paid job. My income tax is levied on all the money earned, not just on the additional, non-inflation based income. So why, logically, should capital gains be different?
I am with you Cyndy
You’ve given a counter argument Cyndy. You were of course actually paid the cash as income in each year, and if your pay increased in line with inflation then the amount of tax should too, and you should still be left with the same amount after tax to buy broadly the same things year after year. Whereas the long term owner of a capital asset usually has had to wait many years to realise the proceeds on a disposal of their asset. But if we tax notional gains, not real gains, then the seller won’t be in a position to buy back the same asset at the same inflated price. Perhaps that is what we want. But the result is that some people will be deterred from selling when they should, because they will lose money.
On a more general level, for most people, capital gains are not the same as income.
Why should we have the right to mainatin our gross capital without paying tax, Andrew?
We do not have the right to mainatin our gross incomes without paying tax – and rightly so.
I see no difference
Morning, Richard. Perhaps we should start with asking, “What is the probem?” If it is the inflationary ballooning of property prices which emphasises the grossly unfair economic disparities in our society, then we should next ask if your proposed solution does anything to change that.
The answer is surely, that it does not. All, it does – pace your examples of perfectly run family, and personal finances (complete at one point with tax advisers, which apart from all other issues raises the question ‘Do we really want to sponsor more of these?’) – is to create an enormously cumbersome and potentially complex system for eventually syphoning off some of this inflation of value after the deaths or institutionalisation of owners. Your proposed index of property values would, I suggest, be a farce and a playground for unscrupulous political exploitation; think of the current banding of council tax as an example; such an ‘index’ would quickly be riven with inconsistencies and injustices (in both directions) and provide a perpetual site of struggle as it needed up-dating. And in the end… what has been achieved? I’d suggest very little indeed in terms of the problem with which we started out.
Of course, the problem is a real one but if any tax system was to make any difference, it surely needs to have immediate impact across the whole property market – and it would really only start to make inroads, if ever, on value inflation if it was combined with other measures like building for rent (on the vast scale now needed) by public bodies, including central government, plus relocation policies for industry and administration which actually worked in conjunction with some countrywide control/direction on house and infrastrucure provision. Oh… and a proper public/national plan for social care which stopped or retarded the vulture practice of the care home industry, which feeds off of property inflation.
So…. I come back to a proper regime of progressive sales taxes on all property transactions as I suggested yesterday. Simple, immediate in effect and designed by those expert if the field, I am not, to encourage limiting/restraining ballooning valuations in at least some of the ways I proposed in my post last evening. Perhaps with tax paid by both sellers and buyers to encourage a degree of moderation? The problem is certainly real – but it is such a central element of where capitalism has taken us that it needs a combination of immediate tax pressure on the entire market as well as a great range of other policies to bolster and encourage change. At least an attack on sales and purchases, with social concerns at the heart of its structures would do its work at once and might do much to cool/calm an out of control/reason market – whose central problem has hardly changed, except in galloping degree, since the 19th century.
Nigel
We are going to have to disagree
Your solution works against social mobility – which I do not wish to threaten
Mine forces more house3s into the market and reduces inheritance and concentration of ownership
The real answer is more thinking is required
Best
Richard
Thanks for raising this important issue Richard.
I wholeheartedly agree that untaxed capital gains is a serious problem for the reasons you explain.
However I do not agree with your proposal for the following reasons.
Firstly, and least importantly, an “administrative” reason. I think this is best explained by an example. Say someone bought a home for £500k around a decade ago. The house was in a livable, but poor state. So they knew they would not be able to sell it easily. They then spent £200k extending and renovating(so that they would be able to sell. Later they sold the house for £700k (the market wasn’t great when they had to sell). Just looking at purchase and sale price they made a “capital gain” of £200k. But, of course, that’s not really the case; they actually made no capital gain at all.
In this case one might allow a discount for money spent on the house. If you didn’t allow it then you risk killing the home improvement industry, putting builders out of work, and reducing improvements to the housing stock.
Expenditure on house improvements is difficult to assess (what’s improvement, what is maintenance?). But, more than that, do they have records? HMRC only requires records for 5 years. Now, you might say that, knowing that they had to pay capital gains, they should keep records, which is fair. But they can’t keep records retrospectively (if they don’t already have them), especially for works that may date back decades.
So, yes, you could introduce captial gains going forward, but I don’t see how it can, fairly, be introduced retrospectively.
But failing to charge capital gains retrospectively doesn’t really address the issue (at least in the short term, and in the long term we’re all dead).
But secondly, and to me more importantly, I don’t think capital gains on final disposal addresses one of the important problems with capital gains on homes. That is that these capital gains lead to a steady increase in house prices. You make a gain on your current house, which enables you to pay more for your next house, pushing up prices. This constant upward pressure on prices is, as you point out, unfair and divisive.
An alternative approach might be to charge capital gains (going forward) on houses as they are sold. You suggest this would hinder social mobility because people would be reluctant to move. I don’t think so. By charging capital gains on sale it would reduce the upward pressure on prices. If there wasn’t this constant upward pressure there would be far fewer capital gains. Prices would have to adjust if people didn’t make capital gains. Perhaps there might be a short (1year?) transition period, but, IMO, we would then reach a new equilibrium (with lower price rises). Capital gains on sale would also greatly reduce the administrative problems, people would know they had to keep records for their current house.
In summary I think retrospective capital gains on final disposal would be unfair and (despite your examples) an administrative nightmare. Conversely, despite your comments, I think capital gains on sale is both workable and fair.
I explicitly allow for the cost of improvements to be claimed in my proposal – if records were kept. I always have to evidence changes to buyers as it is a standard sale question. In other words, yiu bare objecting to something I am not suggesting. And social mobility prevents charging during life.
“If records were kept”.
But what if records weren’t kept, which is a likely scenario for building changes many years ago. Perhaps there might be records of the changes – but it’s much less likely that there would be records of the costs.
It’s OK to introduce capital gains tax on final disposal, though I disagree. But not fair or practical to do so retrospectively.
But that was my less important point.
What about my second, more important, point that capital gains tax on final disposal does not address the continuous pressure for price rises?
Taking into account your most recent post “The Taxing Wealth Report 2024 and modern monetary theory – again” and the need not to have too fast changes. One could introduce capital gains on houses initially at a lower rate and then increase to the standard rate (hopefully the same rate as income tax).
Whilst I disagree with your proposal, I do agree about the problems with lack of capital gains tax on primary residences. These comments are offered to stimulate further thought (as you requested) not to stir up disagreement.
But how do we mainatain social mobiliyy in that case?
Maybe you are right – from a very low base.
But will that still be an impediment? I think so, hence my choice.
A comparative study of CGT on main homes may be worthwhile. See how it’s done elsewhere and the problems and successes. Here’s one , there may be others. https://blogs.lse.ac.uk/lselondon/housing-taxation-across-europe-changing-for-the-better/
Apparently only 4 European countries charge CGT. The authors say not charging is a political decision as it would be highly unpopular as people would fear losing money. But they also point out that failure to tax housing leads to greater inequality.
We are between the devil and the deep blue sea…
I have chosen to wade there
Thanks. That is an interesting comparative analysis. 20 European countries plus the US and Australia.
To quote the executive summary:
“Do owner- occupiers and landlords pay capital gains tax?
* In most countries in the survey, owner-occupiers pay no capital gains tax and this position has not changed over decades. The exceptions are Portugal, Spain, Sweden and the USA.
* Among those countries where capital gains tax is generally not taxed, tax may be charged if the owner sells within a few (2 to 5) years and does not purchase another home fairly rapidly; and on second homes especially if they are let out.
* Landlords across all survey countries normally pay capital gains tax on nominal increases in value. However, the details vary greatly, both between countries and landlord types.”
The figures in Section 10 for the comparative amounts of taxes levied on property are interesting. The UK is higher than average, both as a percentage of GDP and of taxes raised.
And it is still very small
While I’m not opposed to the idea of taxing capital gains on homes, I think there *are* other ways to tackle house-price-driven inequality. These don’t have to be instead of taxing gains, they could be in addition.
There are 2 main other methods I can see. The first is placing limits on the use of borrowing to buy residential properties. The main driver of house prices is simply the amount of money (including borrowed money) available to buy houses. This is why cutting stamp duty doesn’t help: it just means that the money that would have gone on stamp duty instead goes into an increased sale price. And this is why all the government schemes to give or lend some money to first-time house buyers are useless: they simply put more money into the pockets of house *sellers*. So go in the opposite direction: stop giving public money away to inflate house prices, and instead limit the use of borrowed money to buy properties. E.g. perhaps borrowed money for new residential property purchases should not be allowed for any BTL (except by local authorities or housing associations), but only for owner-occupiers, and not for second homes unless there are good reasons for needing more than 1 home (e.g. different locations where household members work, are educated, need to be for healthcare-related reasons, etc).
Secondly, enhancing tenants’ rights has the double merit of directly helping tenants while also putting some downward pressure on house prices by making being a landlord less profitable. This would work best by doing 3 things simultaneously: controlling rents (comprehensively: i.e. for new lets, as well as controlling rent increases), banning no-fault evictions, & giving tenants the power to demand properties are properly maintained. If you don’t do all 3 together, the missing measures undermine the effectiveness of the bits you have done (e.g. tenant demands repairs, so the landlord give them notice to quit, or raises the rent sharply). On maintenance, I think the tenant should have the right to insist the maintenance is managed by a third party, not the landlord, similarly to the rights leaseholders now have.
I can’t see Labour buying that but I see the justice in what you are saying.
No, I can’t see Labour buying it, either. But the same goes for taxing gains on homes. Restricting our horizons to things Labour might buy would imply giving up on fixing the big problems.
Agreed
One practical objection. Your worked example ends with “I cannot see the complication in this.” I’m financially savvier than the average person about such things, having filed taxes in the UK and US and helped family members with their tax returns. But I could not follow the example, and while I’m sure given time and scrap paper I could figure it out, I don’t think more tax laws that people don’t understand is an obvious answer to anything.
Having said that I don’t object to the idea. I’ve recently been thinking that every residential property (whether occupied or let) should have a named (UK-resident) owner, and every UK resident should have no more than 1 property on which they are named. That puts a natural limit on property ‘empires’ to keep prices down, so works in the same direction as your plan albeit at a smaller scale.
An alternative that Steve Keen advance during the last Australian elections was a a type of debt jubilee to reduce house prices, without reducing the equity for home owners (not landlords)
– A “Monetary Reset”, which reverses the private debt mistakes of the last 30 years; an
– Rules that limit mortgage debt based on the income-earning potential of the property
https://www.patreon.com/posts/new-liberals-61077693
I am not sure that ever had a hope….
A big thank you for addressing the housing issue.
Some of the above comments will help to improve your proposals but I am astonished that others appear to be nit-picking as though they have not noticed the enormity of the inequality – from multiple (sometimes enormous) dwellings, down to shop doorways and park benches? And that while expressing no shame at the astronomical financial discrepancies.
Perhaps wealthy UK TV producers (‘Escape to the country’, ‘A place in the sun’) can see no problem. Ratings rule that the public may be deceived – but the young will surely not tolerate these horrors for ever.
What’s more, because your ‘tax haven’ reporting proposals are so well-explained and logical, they have been adopted in other countries. The same will apply to your TWR 2024 suggestions. On housing, UK politicians (and right-wing journalists) may resist your housing ideas but they cannot, with integrity, deny the urgent need for massive housing reform. It is cruel for politicians to speak of a ‘housing ladder”.
Thank you
Regardless of the pros or cons of putting CGT on private dwellings, one would have to conclude in practical terms it would be an utter nightmare. The vast majority of people have no contact with HMRC. They receive their wages under PAYE, once they get their money in their hand its theirs to spend as they see fit. They never keep records of expenditure for tax purposes , because they have no need to. They form relationships and move in together, buy houses on their own and jointly, sell houses when relationships end, move from rented accommodation to owned and back again, trade up and trade down properties sizes and values at various points of their lives. The idea that HMRC can keep tabs on tens of millions of people’s property transactions over perhaps 50-60 years and then tax them in any way correctly (or indeed fairly) either along the way or at the end of their lives is fantasy.
HMRC doees not check anyone’s tax. It is for them to get it right.
And about 1/3 of all taxpayers do submit a tax return each year already. Your ‘vast majority’ is incorrect.
And what is being suggested here is really very much easier than most tax demands
So, with respect, you are completely wrong in making this claim. It’s simply not true. And I have offered an alternative for when records are not available – which you have ignored.
It’s depressing to read claims like this which have not a shred of substance to them.