CGT Review Could Be Disastrous For The Housing Market

A review into the Capital Gains (CGT) regime has been requested by the Chancellor of the Exchequer, Rishi Sunak, causing worry in the property industry.

In his letter to the Office of Tax Simplification (OTS), Mr Sunak requested that a review be undertaken to “identify and offer advise about opportunities to simplify the taxation” as well as “ensure the system is fit for purpose”. Mr Sunak also stated:

“This review should identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent. In particular, I would be interested in any proposals from the OTS on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”

In the call for evidence in the review of CGT, published by the OTS, they are specifically examining the “acquisition and disposal of property” as well as the “practical operation of principal private residence relief”. This means that not only businesses could be affected but individual homeowners, landlords and investors.

David Alexander, joint MD of Apropos has stated that the results of a review could potentially see homebuyers, investors and landlords leaving the market. In a statement Alexander said:

“While Rishi Sunak’s interventions last week to stabilise and encourage the housing market were welcome this announcement is less so.

“While this is only a review and may result in no changes to CGT, it is clear that the Chancellor sees potentially rich pickings among the wealth accumulated in property. He needs large amounts of money to fund the government response to coronavirus and one of the easiest targets is always property as it can’t be hidden, and it can’t be taken abroad.

“However, to tax the value accumulated in an individuals’ home would surely be political suicide. Therefore, the assumption must be that he is looking for income from second homeowners, landlords and property investors.

“Targeting the private rented sector (PRS) is extremely risky as it is the second largest provider of homes in the UK and it would be impossible to fill this gap if there was a mass exodus from the market over a short period.

“Equally any sudden increase in CGT for this market could flood the market with homes and depressing prices at a time when the property sector is in desperate need of support.”

“It is important, at this difficult time, to develop strategies to pay for the pandemic which both encourage economic growth whilst also increasing government revenues.

“Raising CGT rates feels like a move that would stifle growth, discourage investment, and depress the housing market.

“I think people need to feel they have an asset that is worth something and property has always been a particular British obsession.

“To put a cap on that value may disillusion many.

“Equally the PRS and property investment sector need to feel that the UK is a safe and profitable market now and, in the future,, and this could divert money from the UK to other markets at a time when it is most needed.”

Although some feel it is unlikely that the Treasury will touch the exemption for people’s main homes, as it would be “political suicide”, it may be tempting, especially with the exemption worth around £26.7bn.

Nimesh Shah, a partner at Blick Rothenberg, said:

“After all the good news at last week’s Summer Statement, this is probably an early indication from the Chancellor that CGT is the first tax set to rise. There has been significant recent speculation that the main rate of CGT of 20% is set too low, and some have suggested that it should be aligned to the income tax rates, up to 45%.”

“There is a very compelling case for tax reform and simplification generally. There are five different CGT rates which could apply for an individual realising a capital gain – 0%/10%/18%/20%/28%. There is a good argument to say that there should be a single flat rate of CGT.

“After the good news for homebuyers and property investors that SDLT would be cut for transactions below £500,000, the biggest axe could fall on main residence relief – this is a very generous CGT relief which can effectively provide tax exemption for when someone sells their main residence. There has been previous speculation that the relief could become subject to a per transaction or lifetime cap or abolished completely. Property, and residential property, has become one of the most heavily taxed asset classes in the UK – the main residence is one of the few remaining tax reliefs associated with property, and so it’s logical to suggest that the Government may be looking at how additional tax revenue could be generated from this area.”

There are those however that feel that it would be “highly improbable it [the main residence exemption] will be removed”.

Rachel Griffin, tax and financial planning expert at Quilter, said:

“Without the relief some people would have a massive tax bill which they could only afford by taking some of the equity from a property sale transaction and using it to pay HMRC. That would subsequently impact their ability to move up the ladder so it could slow transactions and put some people off moving. The Chancellor has only just introduced temporary stamp duty relaxation in order to grease the wheels of the housing market, so it is hard to see him taking steps that could disturb property sales.”

It is clear that the review will need to consider various options as well as their results on the housing market. Increases in CGT rates or the loss of the main residence exemption could easily stifle the market due to people not wishing to pay large amounts on tax meaning they are unable to move up the housing ladder, to those not wanting to downsize as they would see no release of money after CGT.

Mark Hayward, Chief Executive, NAEA Propertymark, and David Cox, Chief Executive, ARLA Propertymark, commented on the Treasury’s review into the capital gains tax system.

“The government need to tread with care with the review into the capital gains tax system and all consequences, whether expected or unexpected, need to be considered. If the review includes allowances too, which would be sensible, then as with the recent stamp duty changes, taking people out of the tax equation should be an aim too. Increasing rates further for investment properties could reduce appetite from landlords who provide vital housing to the private rented sector, which will have a detrimental impact on supply.”

The review by the OTS calls for responses on the principles of CGT by the 10 August 2020 and on the main section of the call for evidence by the 12 October 2020.

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