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Main residence

29th Sep 2014
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It has always seemed that the exemption from CGT for the main residence was one of those things so ineluctably British that nobody could ever meddle with it, even if it is a factor in the ludicrous inflation of property prices, says Simon Sweetman.

But then it was always said that mortgage interest relief could not be abolished without rioting in the streets, and in the end it proved possible to abolish it inch by inch.

Kate Barker, formerly of the Bank of England’s monetary policy committee, suggested this week in a new book (‘Housing: Where’s the plan?’) that charging CGT on disposals of the main residence would discourage “over-investment” in housing. Which suggests (implausibly enough) that the inflation is caused by people going for the most expensive property they can find (rather than the cheapest one that can meet their housing needs). As so often, attention is paid to the behaviour of the prosperous few rather than the indigent many.

Barker is aware that the simple answer - a straight switch to a CGT charge on disposal - would be politically impossible. Or it might just not be part of somebody’s manifesto. The present government has shown how successful the introduction of radical policies unmentioned to the electorate can be if you have the media on your side, but that would hardly be possible for this: the Mail and the Express would have kittens.

To sugar the pill, house prices would be rebased to the date of introduction of the tax. Then the proposal would be to roll up the charge over a lifetime and raise a charge to tax on the death of the second partner (ignoring complications about remarriage, etc.). The tax would be subtracted from the estate for IHT purposes (which of course it would, being a debt on the estate). But of course this would mean that estates which would not bear IHT (and that’s still 90% of them) would now carry possibly huge CGT bills. Many of them would not have the money to pay it. And it would be some time before any tax was collected at all. So the desired effect is psychological.

A far more serious problem is the huge and increasing amount of UK property owned by non-residents for investment in the UK’s overheated property market, with gains being free of UK tax and, in London, many properties being deliberately left empty. 

For home owners the real problem is the rate of interest. Not the rate of interest now, but the absolute certainty that in the not too distant future it will rise steeply: and on current trends (a trend that will continue if the market alone is allowed to dictate wage levels) wages will not.

Once again we have proposals to twitch the smoke and mirrors UK economy. What is needed is a real redirection.

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By User deleted
30th Sep 2014 08:43

Changing people’s housing patterns …

Surely the first thing we need to recognise is that housing in London is a microcosm and not really representative of the rest of the UK also as already mentioned interest rates will revert to the mean at some point in the not too distant future

There is also the looming issue of accidental landlords who are shortly going to have to demonstrate income to support their buy-to-let mortgages

Additionally, there is also one other wrinkle that distorts matters - in the UK we get 100% IHT tax relief on business assets. which allows a business to be passed on to the next generation who get it tax free to do with as they please – run it, sell & pocket the cash etc. This situation is reflected in farmland and effectively means a commensurate rise in the asset prices to account for ‘avoided’ IHT.

The other model is the one employed in Germany where there is IHT relief conditional on running the business for 7 years on broadly the same terms as in the 7 years before being handed over - http://www.german-probate-lawyer.com/detail/article/german-inheritance-t...

For those who are asset rich and cash poor the private sector offers various flavours of equity release. However, why can the state not offer an equity release approach to alleviate hardship or simply reduce taxpayer pay-outs? At the end of the day the state would get the house and at the rate house prices are rising this would be a good deal all round – furthermore, it would enhance the state based housing stock in the country – which seems to be all the rage at the moment with affordable housing.

Removing CGT on main residences is always going to be a tricky one and any moves to selectively penalise foreign ownership will be a non-starter

Mansion Tax

On the other hand Labour’s badly thought out and appallingly delivered ‘mansion tax’ does have legs in a different form – why not re-jig the idea as follows and call it a ‘fairness tax’ – after all it’s all in the name and the opponents have managed to get their label of ‘mansion tax’ in first

The current domestic rating system is based on banding which is capped at a certain level. This in turn means that those with lower value properties pay a greater percentage of the value of their property in rates – therefore is it a fair and equitable approach that those with lesser value properties should subsidise people with high value properties?

Why not remove all domestic rates banding and charge everyone irrespective of location or property the same fixed annual percent on the value of their house? The value of their house would be determined by the last recorded purchase price on Land Registry; which means there can be no argument about value

There are many benefits from such an approach:

- Asset rich/cash poor people who have had their house for many years would only be charged on the original purchase price of the property 10-20 years ago

- Equitable - everyone would be treated in the same manner and pay the same proportion of their property value. No free-ride for high value properties

- Simple to collect with no challenges to valuations - after all you bought it at the price recorded in Land Registry

- Easy to change the rate percent universally

- Would in some way mitigate the loss of CGT on high value properties because in these circumstances, rates in this form would be akin to an annual property value tax – partially collecting lost CGT each year along the way

Finally, this approach may moderate the large price rises in London whilst not having a great impact on other areas of the UK

So in this respect I am all in favour of a property ‘fairness tax’ – after all you wouldn’t buy a car if you could not afford to run it, so apply the same principle to housing

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By User deleted
01st Oct 2014 10:26

Jeez ...

... you pay tax on your property already, council tax, why another tax?

If you buy an older property the running costs are going to be high enough anyway without paying tax to profligate spendthrift governments.

Better go after non-resident landlords, have much higher stamp duty, 50% tax on letting profits, no relief for mortgage interest (that should apply to all landlords - it makes me angry that young people can't get a mortgage so have to rent at 20% more than the mortgage repayments would be so they are paying someone else's mortgage). You could even make it so that the maximum ltv for a btl is 25%.

If someone chooses to forego flash cars and expensive numerous holidays so they can by a nice house in a nice area why the hell should they be punished. Go for the landlords, tax them out the market so prices fall back to a level that those who need them can afford.

There is also a strong argument in my book in making it illegal to own UK property if you are not UK domicile, or if you can have a punitive CGT rate, 90-100% would be fine with me.

I would advocate exemptions to residential trusts owning property with a view to providing low cost housing for low income persons.

That said, Governments should be looking to cut tax, not think up new ways to rob the population.blind. If tax were made simpler and rates cut the tax take would increase, collection and enforcement costs would fall and these measures would be unnecessary, especially combined with ensuring public spending is properly managed and controlled!

Not saying this is the entire problem, but a major part, the other main part is a shortage of housing - so restrict demand ...

The buy to let market is the worst face of capitalism for the damage it does to the entire economy, just so a greedy few can amass private fortunes.

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By User deleted
02nd Oct 2014 08:47

Different use classes ….

@Old Greying Acc...

Over the years there have been various ideas about having different usage classes or rating categories for domestic residences in pretty much the same way as commercial have use classes (A1, A2 … B2) - all of which have come to nought

This approach would allow domestic residences to be placed in the correct slot (i.e. home owner living, holiday home, residential landlord / buy to let etc.) so that every residential property category can be identified and dealt with in the same manner for topics such as rates

Taking this approach would also allow local councils to have control of the number of buy-to-let or holiday homes (rented or otherwise) etc. in an area and subject the different categories to planning rules.

After all if a business wishes to change their usage category from B2 to A1 they have to apply for planning permission which need not be granted - so why is the same principle not applied to domestic residences

This would avoid ‘ghost towns’ that are heaving in holiday season and yet die off-peak; furthermore, it would allow the local population to have a say in how residential property was used in their locality - especially by non-local absentee landlords

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By User deleted
02nd Oct 2014 21:06

Can't argue ...

... with that - why not put BTL's on the UBR, after all, they are a business, as long as the owners wouldn't he want roll-over relief to avoid CGT!

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