Profits Made On Your Home Are Tax-free

[Mr Yogi]

All this talk about stamp duty has got me thinking.

Whenever we make money we are taxed on it, with one notable exeption. Profits made on ones main residence are totally free of tax in ones lifetime.

Apart from the fact that this has always been the case, I am struggling to think of a single rational reason for this discrepancy.

If these profits were taxed, we could probably abolish both stamp duty on house sales and inheritance tax.

All in all, this strikes me as a far more equitable solution than the current situation.

It would also be very easy and cheap to collect as all the figures are on the public record.

Edited August 7, 2008 by Mr Yogi

[bobby9983]

All this talk about stamp duty has got me thinking.

Whenever we make money we are taxed on it, with one notable exeption. Profits made on ones main residence are totally free of tax in ones lifetime.

Apart from the fact that this has always been the case, I am struggling to think of a single rational reason for this discrepancy.

If these profits were taxed, we could probably abolish both stamp duty on house sales and inheritance tax.

All in all, this strikes me as a far more equitable solution than the current situation.

It would also be very easy and cheap to collect as all the figures are on the public record.

It would stop many people moving from a lending standpoint as their deposit (current equity) would be taken away. It's not more equitable, just the same really but in a different guise, assuming you want the same amount of tax to be generated, why change? Also, all stamp duty transaction and deaths are recorded on the public record.

If you put a tax on the sale of a persons last house, i.e. the one they die in or move out of into old age accommodation then all you are doing straight swapping inheritance tax or simply taking away a portion of their retirement income.

[AteMoose]

capital gains are exempt for the first £9,200 gains each year. Including primary housing in capital gains probably would bring in alot less tax unless you dropped this limit...

[Potwalloper]

Like most tax, a levy on house equity would not work.

People would get round it - the ones who shouldn't.

People would get snagged up in it - the ones who don't deserve to.

Any income derived would be wasted by the government.

THe new motto for goverment should be FINGERS OFF!

[JustYield]

Apart from the fact that this has always been the case, I am struggling to think of a single rational reason for this discrepancy.

It's a legacy from the time when those who owned also had the influence in setting such policies.

Also, if you make the carrot really nice, more people are inclined to get into ridiculous amounts of debt and become good honest voting wage slaves for 25 years or so.

Hmmm, carrot. Lovely.

[Mr Yogi]

It would stop many people moving from a lending standpoint as their deposit (current equity) would be taken away.

So it would reduce demand and therefore act as a brake on future house price inflation. Isn't that a good thing?

It would also take the shine off the 'business' of buying a run-down house , tarting it up while supposedly living there (but not really) and flipping it at a tax-free profit.

Isn't that a good thing too?

[Potwalloper]

It would also take the shine off the 'business' of buying a run-down house , tarting it up while supposedly living there..

Isn't improving the housing stock a good thing too?

Let's change "what if we did" to "what if we didn't"

Edited August 7, 2008 by chute

[newbie]

As the OP suggests, it doesn't seem fair that money generated by work is taxed up to 40% but money generated by doing nothing is tax free.

[Potwalloper]

As the OP suggests, it doesn't seem fair that money generated by work is taxed up to 40% but money generated by doing nothing is tax free.

So stop taxing at 40%. Don't try to mash everybody with the tax mallet even harder.

[AteMoose]

As the OP suggests, it doesn't seem fair that money generated by work is taxed up to 40% but money generated by doing nothing is tax free.

financial rewards are tilted in favour of those who take financial risks, running a business, owning assets, gearing etc etc. Inflation is a tax break for the indebted people with assets, but a tax on cash savers asset poor.

Edited August 7, 2008 by moosetea

[Minos]

All this talk about stamp duty has got me thinking.

Whenever we make money we are taxed on it, with one notable exeption. Profits made on ones main residence are totally free of tax in ones lifetime.

Apart from the fact that this has always been the case, I am struggling to think of a single rational reason for this discrepancy.

If these profits were taxed, we could probably abolish both stamp duty on house sales and inheritance tax.

All in all, this strikes me as a far more equitable solution than the current situation.

It would also be very easy and cheap to collect as all the figures are on the public record.

What a good little boy you are. A good little tax payer. The discrepancy is why do I have to pay tax at all.

[Mr Yogi]

Isn't improving the housing stock a good thing too?

Let's change "what if we did" to "what if we didn't"

Nothing wrong with improving the housing stock - far from it.

Why should profits made this way be uniquely free of tax, though? It doesn't stack up.

If all the run-down houses are tarted up by speculators who then clear off with the profits there will be no cheap houses left for genuine home-buyers to do up for themselves. For many this is the only realistic way of getting a nice home.

[Pob]

As the OP suggests, it doesn't seem fair that money generated by work is taxed up to 40% but money generated by doing nothing is tax free.

I think again people are making the mistake of assuming that increases in prices = profit. For most people increasing prices just means more wasted money on cr@p and higher debt. More MEW and more leverage. Realistically the only people making real money on property are parents who bought back in the 1960's. This profit is generally only considered if they downsize or die. Neither of which I feel should be taxed.

Also bear in mind that any taxation woud be duductable based on costs. So you could deduct all mortgage interest repayments agains any proft. You would probably find there wasn't much profit left after a 25 year mortgage.

Don't get caught in the trap of "My house has gone up in value by £100 K so therefore I just made £100 K by doing nothing". No you haven't. You have an asset that has increased in value but until it is sold and you move into cardboard city you have'nt made a bean. My parents tend to do this with sharess, "we made lost x today on our shares". Not until they are sold. In the mean time they are as worthless as used bits of toilet paper (dividends excepted of course).

[Wad]

This is a question I have also asked myself quite a lot over the last few years.

I do not own a house and never have. Instead of investing in a house I put all my spare capital in the stock market, bond market and commodities. Its how I make my living and I pay the rent from my investment income.

I pay tax on the dividends and interest as well as the capital gains on my investments and I also pay stamp duty on share transactions. Conversely, I would pay no tax on capital gains in a house although I would pay stamp duty.

On the face of it the tax benefit of owning an owner occupied house is substantial as no CGT is paid on capital gains.

However, for the average home buyer the tax benefit is negligible and the only really big gainers are those wealthy old people who have lived in their house a long time. Here is why:

Lets make the heroic assumption that a young married couple buy an average house for £200k today by putting down a deposit of £20k and then have no other substantial savings left over. Lets also assume they will move out after 5 years and will have made 100k profit after all moving costs and legal fees.

They will have made £100k tax free but as they have really stretched to buy a house and no other savings they will not have used any of their £9200 personal tax free capital gain allowance in each of the five years. For two people, thats a total of £92k over five years of tax free capital gains they were entitled to anyway. Assuming the CGT free allowance will increase with inflation over five years takes the total allowance they have not used to well over £100k. Add to that the fact they could also have grown their £20 deposit CGT free by investing in shares via a PEP/ISA and also add on the fact that they would pay stamp duty of £2000 (1%) on the original purchase.

All in all the average couple who really stretch to buy the average house today is unlikley to make more tax free gains than they are entitled to via their personal CGT free allowance which most people never use - especially when every penny they have is invested in their home or spent on a mortgage.

The only thing that makes the whole house buying thing 'look' attractive is the massive leverage and bubble gains that people have made over the last 10 years - but of course we are now seeing the downside and the losses are beginning to come through. Tax free gains may be a decade away if anyone buys a house today.

I will invest in a house one day (when they are cheap) and plan to live there until I die but I am not going to make a bad investment now on the slim chance of making an illusionary tax free gain.

[Potwalloper]

Why should profits made this way be uniquely free of tax, though? It doesn't stack up.

Yes it does. There is a risk associated with doing this (see other posts too) whose negative results you are beginning to see all around you.

[Mr Yogi]

So stop taxing at 40%. Don't try to mash everybody with the tax mallet even harder.

I remember when the Tories reduced the top rate of tax down to 40% to great fanfares and declarations of how this unprecentedly low rate would stimulate enterprise.

Now you're saying its too high?

It still seems very low to me compared to rates on the continent and here historically.

[Potwalloper]

Now you're saying its too high?

We pay far too much tax hidden and otherwise. "The continent" do too, although they are far better at spending it usefully.

... or are gender awareness workshops good use of house buyers' equity?

Edited August 7, 2008 by chute

[steve99]

All this talk about stamp duty has got me thinking.

Whenever we make money we are taxed on it, with one notable exeption. Profits made on ones main residence are totally free of tax in ones lifetime.

Apart from the fact that this has always been the case, I am struggling to think of a single rational reason for this discrepancy.

If these profits were taxed, we could probably abolish both stamp duty on house sales and inheritance tax.

All in all, this strikes me as a far more equitable solution than the current situation.

It would also be very easy and cheap to collect as all the figures are on the public record.

Perhaps with a proper CGT on house sales would prevent future speculation in the housing market and keep a lid on prices, ie keep it out of the focus/view of profiteers.

[CrashConnoisseur]

Owner-occupiers also pay no tax on their imputed rent regardless of whether they're paying mortgage interest or not. That's a much bigger tax advantage than no CGT.

[JustYield]

Owner-occupiers also pay no tax on their imputed rent regardless of whether they're paying mortgage interest or not. That's a much bigger tax advantage than no CGT.

Don't give them ideas, ffs.

[redwing]

Profits on your own house are tax free because losses on your own house are not tax-deductible.

[ader]

Applying cgt to principal private residencies wouldn't generate much tax unless the allowances were done away with.

Removing the allowances and charging the cgt would primarily result in people being unable to move house for a new job etc. This would be really bad for the economy and all of us, cause companies to go bust, keep people otherwise able to work on state benefits etc.

A better idea would be to scrap cgt altogether, imho. And pay for it by cutting the waste of local, regional and national government.

[Wad]

Owner-occupiers also pay no tax on their imputed rent regardless of whether they're paying mortgage interest or not. That's a much bigger tax advantage than no CGT.

My father in law was talking about this a while back. He said they had something called Schedule D Income Tax in the 1960s which effectivley taxed you on the implied rental income that you were saving by owning a home. Having said that they also got MIRAS so you got relief on the interest you were paying on a mortgage. My understanding was that it put a owner ocupier in the same tax posiion as a LL who was renting property out - there was no real tax advantage to owning.

Is anyone old enough to remember taxation of implied rental income on housing in the UK?

It seems to make sense to me but only if they reintroduced MIRAS as well.

Edited August 7, 2008 by Wad

[cartimandua51]

My father in law was talking about this a while back. He said they had something called Schedule D Income Tax in the 1960s which effectivley taxed you on the implied rental income that you were saving by owning a home. Having said that they also got MIRAS so you got relief on the interest you were paying on a mortgage. My understanding was that it put a owner ocupier in the same tax posiion as a LL who was renting property out - there was no real tax advantage to owning.

Is anyone old enough to remember taxation of implied rental income on housing in the UK?

It seems to make sense to me but only if they reintroduced MIRAS as well.

It had recently been phased out when I started studying accountancy. It was Schedule A, BTW - which did and does deal with nearly all income from land (lodgers etc are the main exception - Sch D case 6). As mentioned above there is a general rule that if you tax profits, losses are allowable (which is why gambling profits are not generally taxable - the IR would be in for MUCH bigger loss claims!). Also:

*if you are being taxed on the profits it becomes like a business so mortgage interest should be allowable - nasty cash flow implications for the Govt - relief given now but CGT at some unspecified date in the future (or not, if there's a crash!)

*moral hazard- the habit in France & Spain, for example, of some of the cash passing under the table between buyer and vendor. I understand that the notary obliging leaves the room to visit the loo so he doesn't have to see this.

*difficulty in moving as mentioned above - a similar problem exists with people who have council housing in the North - they can't move to where the jobs are because they'd never get housed there.

* council tax is, to all intents and purposes, already a variety of Schedule A tax, though admittedly collected whatever the tenure.

* repairs and maintenance were also allowable - a major admin headache for the IR

According to a Parliamentary answer last year, eleven-twelfths of owner-occupiers were not making claims for repairs and maintenance to their homes against Schedule ‘A’ Tax. This high proportion seems to indicate that many people who could make claims are not doing so—and probably are unaware that they can. Many might be able to claim a refund of tax for several past years. (article by Margaret Thatcher 1960)

I could probably dig up some other stuff - but time presses....

Edited August 7, 2008 by cartimandua51

[6538]

BECAUSE WE PAY ENOUGH F*CKING TAX!!!

DON'T GO GIVING THE B@STARDS IDEAS!