Proposal of an annual capital gains charge on homes unacceptable says UK200Group member

A leading think-tank, The National Institute of Economic and Social Research (NIESR), has proposed the introduction of an annual capital gains charge on homes, which it is calling on the government to consider.

A new report by NIESR has warned that first-time buyers will continue to be unable to access the market, while property was lightly taxed compared with other assets.

They said that it must be a priority to improve the taxation of housing and added that an efficient tax system would create consistency across all assets.

It said its proposed charge would reduce the gains in an upturn and losses in a downturn, so reducing house price cycles.

Duncan Montgomery, tax partner at UK200Group member firm Whittingham Riddell, said:

“The suggestion by NIESR that every home should have an annual gains charge is frankly unacceptable. The idea that a gain in one year should be taxed when there is no cash to pay it goes against almost every part of the Capital Gains legislation, where reliefs and policy throughout are based on the fact that gains that have no cash attached should in general not be taxed until the cash is apparent; whole elections and systems are built around this.

“What would happen if prices fell – would HMRC be issuing rebates? If not this is a one way deal, and frankly the policy objective of homes being freed for purchase by those presently unable to be a first time buyer has better ways of being facilitated using CGT rollover for landlords, and in the second place, that objective is an outcome that may not be for the best.

“Most European countries have high volumes of rental markets; there is no logical reason why government policy on taxation should be used as a big hammer to force property on to the market. Building homes or converting brownfield or indeed encouraging renovation is far more effective than taxation to move markets.”

Jonathan Russell, partner at UK200Group member firm ReesRussell, said:

“There are certain quirks in the current tax system. Generally capital assets, if owned, are potentially subject to taxation or relief if they increase or decrease in value at the point when that asset is sold.

“One of the main exceptions is the principle private residence (PPR), an individual’s home, but to some extent there is sense in this as people have to live somewhere and no tax relief is given to the rent people pay, nor the costs they have if buying and there is a general view of taxes that people do not pay tax on their private activities.

“Many people have hobbies, which can produce some income, but it is generally accepted that in normal situations hobbies cost more than they might earn so it is simpler to treat them as non-tax transactions though obviously sometimes hobbies to transform into businesses.

“The slight oddity with property, both those bought for private occupation and those owned commercially, is there is an entry tax on ownership – Stamp Duty Land Tax. If we were to have capital gains tax (CGT) levied on PPR, then would we also have to consider some form of rollover relief as available for trading assets? It is true the thought of paying CGT might depress the market, but it might also encourage people to move more frequently so as to take advantage of annual exemptions or increase the number of people who rent rather than own.

“As a country we probably need to decide if we are a nation that encourages home ownership – good in some respects, but bad for employee mobility – or property rental, which is often a driver to increase an individual’s living costs in old age. If we want to remain the former then CGT exemption should probably apply, but if the latter why not treat it the same as any other capital asset.”