Saturday, March 13, 2010

CGT on houses

Create a healthy housing culture

MSW suggests replacing stamp duty with capital gains. Good idea. Politicians think - bad idea

Posted by letthemfall @ 01:17 PM (2267 views)
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19 thoughts on “CGT on houses

  • mark wadsworth says:

    I emailed her as follows:

    “Dear Merryn

    Take it from somebody who has worked in tax for twenty years, that won’t work either, not even on a practical level.

    The way forward is a progressive property value tax (like Domestic Rates in Northern Ireland or indeed Business Rates) but with more regular revaluations, or even better, land value tax.

    This needn’t mean higher taxes – at the very least you could replace Council Tax (mixture of Poll Tax and property tax) and Stamp Duty Land Tax and Inheritance Tax (jealousy surcharges) with a PPVT of about 0.8% or 1% or something (in Northern Ireland, Domestic Rates are 0.78% of the capital value as at 1 January 2005, they never had Council Tax as such), but the value is capped at £400,000 (which is only fair – above that and you’re liable to Inheritance Tax – so why not scrap the cap and scrap Inheritance Tax as well?)

    Regards”

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  • mark wadsworth says:

    I think I forgot to close the tag?

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  • stillthinking says:

    CGT on houses sounds like a distorting nightmare.

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  • It would help prevent houses being bought as pensions (never could see the sense in that) and booms caused by the ability to make a fortune simply by the expedient of borrowing cheaply and sinking it into the bricks basket.

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  • Capital gains on property are what is needed to reignite the credit bubble and stoke consumption.

    That’s what our politicians largely want. Sad.

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  • I think Saint Merryn has hit the nail squarely on the head – stamp duty is a pretty rotten tax, especially if you live in the south or you have to change job. Possilby its why everyone I know seems to think nothing of a 1 or 2 hour commute.

    I am curious to know more about why Mark and Stillthinking think that CGT on primary homes is a bad replacement though.

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  • If a home is a taxable asset there must accordingly be deductible expenses to set against any capital gain. This was the case before when mortgage interest was deductible.
    Lets reinvent the wheel !
    Instead of trying to reintroduce old measures that failed (BUT worked for the rich with good legal and accountancy advice) why not by some arcane method, ensure that a house is a home and that unless a sale of a property is that of a principal place of residence, then it is treated as a taxable supply in the accepted sense.

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  • mark wadsworth says:

    @ Nubbers, because…

    1) On a practical level, it is quite fiddly working out what the true base cost it, especially if the house was bought decades ago and the owners have spent a lot on improvements. I work in tax, you will just have to accept this as a fact.

    2) Unless there were some rollover provision, it would discourage moving even more than Stamp Duty Land Tax (‘SDLT’). Let’s agree that 4% SDLT is far too high and distortionary. Even if we had a CGT rate of only 18% and your house had gone up by only 25% over a ten year period, the CGT would be even more than the SDLT is currently. So people would either not move in the first place (bad) or they would become ‘reluctant landlords’ and just borrow against their old house to buy their next one.

    3) If there were rollover provisions, the administration would be even more nightmarish and it would not achieve its purpose.

    @ Iguana, but there were old measures that worked and could not be circumvented by clever legal and accountancy advice. We had it in the 1950s and 1960s, and surprise, surprise, house prices were low and stable…

    1. Lots more new construction (whether social housing or for owner-occupation)
    2. Strict mortgage rationing
    3. Schedule A tax and Domestic Rates, which between them amounted to a ‘progressive property tax’ which in turn is not a million miles from Land Value Tax.
    4. We also had strict rent controls, but that was counter-productive and unnecessary.

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  • Hi all

    I’ve been proposing CGT on primary homes for a long time. I think MSW has is ab-so-lutely spot on.

    The system works for secondary homes, and I fail to see why it can’t include primary.

    (1) If you buy a home, this sum is recorded
    (2) If you improve a home, these costs can be recorded
    (3) when you see, the sale price is also recorded.

    – If a tax is difficult to work out, it doesn’t make it unfair
    – If you own a place for devades, then as with other items, tapered relief over time can be incorporated.
    – All of the rest of Europe have this worked out
    – The “discourage moving” argument must mean that everywhere else in Europe “suffers”. I see a far larger rented sector there and people only buying when they want somewhere to live. Therefore with a predicted drop in home ownership towards rented, people would be MORE mobile as they can choose to rent.
    – Homeownerists see “rent” as the public transport of property – the last resort option. With more competition, quality has to improve or rent will fall.

    I find it grossly unfair – complex or not – that anyone should be given a tax-free investment vehicle. People are forced by common sense to get sucked into home ownership since it’s the “dead cert” gravy train due to zero tax in all but a property crash. If people were taxed, they’d think twice about investing in property vrsus other investments. This is likely to reduce house prices since there will be less scope for returns.

    Sorry Mark, I agree with a lot of what you say. But on various grounds I don’t see the difference between property and running a business that can’t be solved by taper relief and accounting as for a second residence.

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  • The second good journalist in a week (the other was Larry Elliott )to say i) that we need stiff property taxes ii) that no party is going to make themselves unelectable by proposing them. So Homeownerism has not only screwed the economy, it has zilched the democratic process as well.Thanks a lot. (As to which tax, MW is ,as usual ,on the money).
    Anybody interested in percentage taxes of house values should scrabble about on the Net for American figures which show some strange contrasts. (City-Data. com is reliable) .On one of their sites residents of El Paso are complaining that they are paying 1,274 quid p.a. on 61k quid houses ; all the yearly Houston valuations are over 2.0%; other places in Texas are up to 3% .But there are also any number of stories on the Net saying there was no housing bubble in Texas.So the inference is clear IMO : there is correlation between bubbles and low property taxes and vice versa.
    Perhaps the markets are s reacting badly to the prospect of New Labour keeping the present housing bubble inflated and no change on that front from the Opposition.

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  • I know I have listed equalising CGT and income tax as a way of tackling the speculative bubble but that would be mainly aimed at second owners and I see it as a tool to fix a current problem rather than a long-term fair solution. Fundamentally I am opposed to progressive CGT and income tax. When it comes to a long term solution, I am now a convert to the Land Value Tax argument from the geolibertarian stance.

    However, this is rather a pointless debate because so long as we have democracy in its current form, the discussion is purely academic, the key comment in this piece being “I suggested it to a senior politician this week. He told me it would make any party unelectable.”

    Democracy doesn’t work because of short-termism and vote buying. I don’t believe politicians do not realise that deflating the bubble and keeping at bay housing bubbles future bubbles is a good thing. But they cannot adopt a policy, no matter how sensible or morally right if it makes them unelectable. This may not be necessarily because they are power-hungry or longing to rip off the expense system.. . even a noble and well-motivated politician will accept a bad populist notion like rampant house price inflation if he thinks it is inevitable collateral damage that he must accept to be elected so he can implement all his other noble ideals.

    To some extent I accept Merryn’s point that “whoever gets into government next is going to be so unpopular as to be unelectable anyway (once they’ve got into the swing of spending cuts), so it might be nice to think that they would do a few things that would be good for us all in the long term rather than good for them in the short term.” and it is possible after the election that with cross party support some anti-dotal home-owner-ist measures could conceivably be implemented. But it will only be a matter of time before the opposition bribe the home-owning electorate to get them back in power with promises of abolishing these reforms.

    Only when the population pyramid has more young voters who are priced out than current owners is there any chance of necessary reform. And even this is an uphill struggle given our previous discussions about how even the priced-out people in their twenties and thirties often think HPI is a good thing because they have a notion that one day they too will be ‘winners’.

    I see democracy as being yet another system which fails to improve civilisation. Surely it will one day join the ranks of feudalism and dictatorship in the annals of history. Even dictatorship can be benevolent (sometimes) … the Chinese government do not have to worry about losing the election as they try to dampen the speculative housing bubble over there at the moment. I have no doubt they will, to some extend succeed.

    We can acuser the homeowners/ baby-boomers of being selfish or whatever but in any generation there is the same mix of people types (clever, stupid, diligent, lazy, selfish, generous, heroic) and characteristics of any demographic group are shaped by their place in history and culture. Ultimately humanity itself seems to be the root problem and after all, selfishness and protecting ourselves and our children at the expense of others is the natural product of evolution. Some of us rise above this completely, some not at all and the majority fall somewhere in between. If human nature is the problem then I pin my hopes on in utero cognitive enhancement programs and a trans human future and given this is itself unlikely, I don’t hold much hope for the future. God, I’ve just really depressed myself now!

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  • After reading the various arguments, I would probably side with Mark on the impracticality of CGT on a primary residence in the long term. The tax systems is far too complex as it is. I wonder what percentage of my earnings and productive time is spent on preparing various tax returns, either at my end, at my accountants or as my tax bill paying for HMRC process it all.

    Sometimes it seems to me that all we do in this country is sell each other expensive coffees, pay non productive civil servants to keep tabs on it all and then hope that somehow the city or rising house prices will pay for everything.

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  • charlie brooker says:

    I wrote to the then Chancellor in 2002 before HPI went really mad proposing CGT among other possible measures to slow down price increases. Their response was that this would only be passed on to the buyer – thus pushing prices up over night.

    Then I discovered the Land Value Tax concept and saw the error of my ways.

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  • mark wadsworth says:

    Growler, let’s stick to the discussion – Merryn said SDLT is bad (discourages moving) and should be replaced with CGT.

    1. While I can see a moral sort of argument for CGT, in practice, it would have exactly the same effect as SDLT. And the administration would be a nightmare – I do tax returns for people and working out capital gains on assets people have held for ages is quite fiddly – not because the rules are that complicated, but because all the old info is hard to track down and so on.

    2. If you bought a house for £100,000 that is now worth £150,000 and you are thinking of moving somewhere else into a different house worth £150,000 and you have to pay 18% CGT (ignoring exemptions), then you are £9,000 out of pocket and can only afford to buy a £141,000 house, so you are more likely to stay put. Whether this would push the price of houses up or down is a moot point.

    3. Compare this with a modest property value tax of 0.78% like in Northern Ireland (they never had Council Tax). You’d be paying £1,170 a year on your £150,000 house whether you stay put or move. So PPT or LVT is no barrier to mobility or efficient use of housing.

    4. And a higher rate of PPVT or LVT would act exactly like a higher interest rate – but without the dampening effect on the economy – and so keep prices down while allowing other taxes to be reduced.

    5. Again, on a practical level, recurring property taxes like Council Tax or Business Rates have the highest collection rates – around 95% of the theoretical total is actually collected. All the fraud and error creeps in with Council Tax Benefit and single person’s discounts and small business discounts and empty property discounts and so on.

    6. As a matter of fact 90% of Council Tax Benefit is paid to people in Band A or Band B properties. With a PPVT or LVT there would be no need for a corresponding ‘benefit’, as the tax on such properties would fall to a couple of hundred of pounds a year.

    6. If you do a projection of how much Inheritance Tax receipts ‘should’ be (based on wealth distribution, mortality rates etc), you’ll find that actual receipts are only a tiny fraction of that (like about a quarter or something), ditto CGT, these taxes don’t even work on a practical level. They are a nuisance and jealousy surcharge and nothing else.

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  • I think mark w makes a good case against CGT on housing, although I still think it preferable to stamp duty; and there might be more chance of getting it than LVT.

    I don’t agree that inheritance tax is a jealousy tax, however, any more than a progressive income tax. One might be able to argue that well designed taxation on income and property would remove the need for such a thing, but at present, with all the discussions on how to pay for care of the elderly, it seems to me an important component of taxation. It prevents accumulated wealth becoming more concentrated in a small section of the population, which I think is unarguably bad for society and the economy. The example of top bankers is a good case in point, but I note a lot of stuff in the papers today about dotcoms, which I think are another good example of a lot of wealth accruing to individuals who really added very little overall value to the economy.

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  • Against a backdrop of rising house prices, stamp duty is not such an issue, other than the absurd stepping of the rate which causes distortions to the market when prices are close to he step point. So much better for the first £100k to be free of SD, and to have a flat rate on the balance.

    However, against stagnant or falling prices it is much more of an issue, as it takes a large slice out of the homebuyers deposit, should they decide to move. This presents a major problem with regard to labour force mobility.

    CGT makes quite a lot of sense, but not if it is levied on every penny of gain. Allowing the first £50k of gain to be tax free and then taxing the balance would make sense.

    However, given the appalling state of the nation’s finances, I think there is a very good chance that we will end up with both taxes…

    ..after the election, of course…

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  • mark wadsworth says:

    LTF: “One might be able to argue that well designed taxation on income and property would remove the need for [Inheritance Tax]”

    Exactly, and that is what I am arguing. Take Northern Ireland, they have a property value tax of 0.78% per annum of capital value as at 1 Jan 2005, but for some reason it is capped at a property value of £400,000. But they still have Inheritance Tax (threshold £350,000 or something) and SDLT (so you pay 4% SDLT if you buy a house for £500,000 or more).

    Would it not make more sense to scrap the £400,000 cap and scrap SDLT and IHT as a quid pro quo? We can debate whether this benefits people who own larger houses or not, but at least it is nice and simple. If you think it would benefit people who own large houses too much, then you can choose a higher rate for the property tax and use the extra income to increase pensions or welfare or the personal allowance or something that makes the system more ‘progressive’.

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  • Pardon my ignorance, but MSW says that Stamp Duty is double taxation, i.e. you pay it from earnings that are already taxed.

    Surely then, most taxes other than income tax (e.g. VAT, Council tax and car tax) are all double taxations? Or am I missing something?

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  • Mark: The trouble is that your LVT is inevitably going to be paid by the occupier of the property rather than the owner (just like Council Tax). With rising house prices the owner still makes huge profits tax free (and that fact alone is pretty much enough to ensure rising house prices). CGT is a much better idea and (as has been pointed out) fiddly or not it is applied to virtually every other asset class there is (including second homes) so unless you propose to remove it altogether I don’t really see your argument. I also don’t agree that it discourages moving because the CGT would have to be paid sometime – there’s nothing to be gained by postponing it. In fact the best solution would be that the CGT becomes payable every time you remortgage (and the banks would have to factor any outstanding CGT into their equity calculations anyway). I don’t see how you figure that CGT is a jealousy tax either. It’d get my vote anyway.

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