Increasing Capital Gains Tax Will Only Hurt The Housing Market

Paul Starkey

Paul Starkey

Chief Commercial Officer at Reapit

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COVID has hit deep in the government’s coffers as they push out record financial stimulus to protect jobs, lives, and livelihoods. But as they give to house buyers on the one hand with a Stamp Duty cut, they potentially aim to take from sellers with changes on how Capital Gains Tax (CGT) can be applied to the sale of residential property. Last month Chancellor Rishi Sunak requested the independent Office of Tax Simplification to conduct a wide-sweeping review of CGT, with any changes anticipated to be announced during November’s Autumn Statement. The government may need the cash, but is it worth the cost?

This is the ongoing conundrum possessing economists at the Treasury – how to pay for over £190 billion in fiscal aid and stimulus spent thus far to support the furlough scheme and retain as many jobs as possible – the budget deficit is projected to rise to £350 billion this year. I doubt any of us are blind to fact that this record spending will have to be repaid at some point, and increased taxation is almost certainly the most straightforward and likely method of doing so.

When it comes to property, CGT is applied when a financial gain is made in the sale (or disposal) of a second home. This can include property owned as Buy-to-Let (BTL) or a holiday home. The rate with which a property owner pays is based on where they sit on the income tax scale. Those on the basic income band of £12,501-£50,000 (20% tax rate) pay 18% CGT on the sale of BTL or second homes, while owners on the higher band of £50,001-£150,000 (40% tax rate) pay 28% CGT. Primary Resident Relief still currently applies for owner-occupiers if the property they live in has been their only or main residence throughout their period of ownership. And some Lettings Relief is also eligible if the owner-occupier is a live-in landlord.

The government has maintained that these reviews are ‘standard practice’ but there is a politically sensitive element to all of this which would be difficult for him to overcome, namely that the Conservative Manifest published during the last election implicitly states that this government would not introduce any tax rises during their term. Nevertheless, these are unprecedented times and probably they could get away with a tax rise under the circumstances given that no one could have anticipated a global pandemic.

Coming of the back of the recent introduction of a Stamp Duty cut, which has already proven beneficial to the market in terms of encouraging buyers to take advantage of what is a temporary opportunity, this potential drive to shift costs over to sellers comes across as a bit disingenuous. While CGT does not apply to primary homes and therefore a tax on multi-property owners and investors might seem popular, any increase to the levy would no doubt spook BTL investors and landlords, either discouraging them from selling and therefore reducing available stock in the buyers’ market, or pushing them to sell en masse ahead of the implementation such a raise, consequently forcing more tenants to move and potentially exacerbating both an imminent eviction crisis and further reducing available stock in the lettings sector.

There is also a worse-case scenario, in that the Chancellor considers the potential revenue on sales to main residential properties. The exemption on primary properties is currently worth a considerable £26.7 billion annually to the Treasury, a sum that is likely to draw more attention to the government accountants with the unenviable task of balancing the books. With market confidence already on shaky ground over a possible second wave and the undetermined conclusion to Brexit later this year, any attempt to squeeze more from wary consumers is likely to result in a considerable backlash, irrespective of the need to replenish the Treasury.  

What the housing market needs now is a free run to build up continual energy, because as we well know, the health of the housing market is reflective of the health of the wider domestic economy. The government recently reported a 31.7% increase to property transactions in June over May, levelling off this momentum at a time when restoring activity in the economy is essential to help out wider industries would be detrimental. No doubt more taxation is coming but this is a marathon not a race.

To play devil’s advocate, a new report on paying for the coronavirus from the taxation policy expert Michael Johnson writing for the Social Market Foundation – a cross party, public policy think tank – argues that leveraging new taxes on the value of homes would ensure that younger people do not unreasonably have to bear the costs of the coronavirus crisis. This would be accomplished through the scrappage of Principal Private Residential Relief and the imposition of a new Property Capital Gains Tax that would accrue for the Treasury £421 billion over the next 25 years. The report argues additionally for completely removing the Stamp Duty levy on main homes to move the tax from the   buyer to the seller, but is this not just passing the buck from one afflicted group to the next?

There is certainly an understanding for increased taxation to recoup the costs of the COVID support, but unilaterally targeting the housing market is not the way to go at this juncture. Any increases to CGT would likely have a substantial impact on the BTL market, and even before the pandemic hit, the country’s housing market was already in a state of crisis, with first-time buyers struggling to get on the ladder and more people renting than ever before.

A further CGT levy may lead to a mass sell-off as landlords seek to beat the tax, particularly as many of them have already lost out financially because of a build-up of rent arrears due to the growing unemployment from widespread redundancies. This will only lead to reduced lettings stock and further increase the rent of what property remains. Increased taxation is surely coming, but it should not be soon, and not like this. Perhaps the main argument against any destabilising changes to CGT at this time are the overhanging questions regarding the end of Covid, as well as Brexit in the months to come. The latter does not appear to be going smoothly for negotiators on either side of the channel, and if no such resolution is in sight we might be back to the same square we found ourselves in over the past few years, with the public holding back on making house moves for fear of an uncertain market. Activity is currently up because of the Stamp Duty cut, but how long really will this last? Opportunity along with pent-up demand are both finite resources.


This article was originally published on LinkedIn.