Friday, May 28, 2010

Put capital gains tax on all homes

Put capital gains tax on all homes

"The Government’s proposed increase in capital gains tax on non-business assets is sensible. But it does not go far enough. A reforming and fiscally responsible government would introduce CGT on all home sales. One day it will happen." It seems to me a very fair way to start to balance the government's books. Start off with the tax at 1% and remove stamp duty to compensate, then ramp it up in future years. What fairer way to tax people than on unearned gains they have made by doing nothing cleverer than buying a house on a mortgage and living in it? I can imagine the howls of outrage that will follow.

Posted by monty032 @ 08:04 AM (2115 views)
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34 thoughts on “Put capital gains tax on all homes

  • Good idea, but would it then mean no one buys a house because it would be cheaper overall to rent, maintenance repairs etc.

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  • “At the moment, capital gains on second homes are taxed at 18 per cent beyond the annual allowance of £10,100. But CGT is not levied at all if the home is your main residence. That is an anomaly. It has no justification in economics or fairness. The case has been argued by economists such as Andrew Oswald, but politicians do not raise it, for obvious reasons.”

    It’s refreshing to read the case for deterring property speculation in such blunt terms. The comments seem to be sharply divided between approval and disapproval – a taste of what lies in store for any politician who dares to challenge the advantages of property ownership.

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  • keith thomas says:

    This would just be an extension of the Government’s favourite tax – inflation. House price rises as mostly down to the devaluing of the currency – it’s not that house prices double but the value of money halves. CGT is mostly down to inflation and should be adjusted accordingly – this won’t happen as it’s a nice little earner for the Government.

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  • I’d be quite happy for a 95% CGT tax on home sales, be them primary residence or not.

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  • Do I get my money back if house prices go down ? Thought not. That’s why it’s a stupid idea.

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  • The Times wants to get its act together.Yesterday they published a leader giving qualified support to the the Tory Homeownerist dinosaurs
    fighting evolutionary change by resisting full-rate C G Tax on second homes though it comes from their own Prime Minister.They have managed to make homeownership a coalition buster on day one of the new government.Cable has indicated he’s not budging.The issues could n’t be clearer for Cameron. Unfortunately this kind of article,sound though it is on its own limited terms (LVT would not immobilise the property market like CGT could do) ,may encourage the 2nd home rebels who will start squealing “See its the thin end of the wedge :they’re coming for all our houses “.
    Strange how Homeownerists who have been there all the time only break cover when threatened.

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  • I really don’t think there is a coherent argument against this rise and the only resistance comes from those who stand to lose. It is utter madness that BTL only really stacks up for many because of the capital gain which has such a negative impact on society, so something has to be done to stop it. You wouldn’t expect to see people becoming taxi drivers because they can cover their costs while doing the job, but then cash in when they come to sell their car 10 years later!

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  • ontheotherhand says:

    I can see by the comments on the Times how unpopular it would be and so it’s easy to see why politicians steer clear. One guy asks why he should pay tax if he sells his home following house price inflation caused by the government. My answer to him is that there would be no house price inflation if there was CGT. Those stepping up to a bigger house would not have made a gain, the house they want to move to would not have rocketed beyond their reach, there would be no stamp duty to pay. What’s not to like?

    How about CGT on your home net of improvement costs and RPI? Without escalating house prices they wouldn’t need to fiddle with Inheritance Tax either since most homes would fall under the threshold.

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  • I agree with @2 and disagree with @6. CGT would not prevent house price inflation as it would have no effect whatsoever on the destruction of hte value of a fiat currency.

    Would CGT on 1st homes just discourage people from moving home, making the populous less mobile?

    On the plus side, it would ruin estate agents.

    recaptcha: Gold which

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  • @7 –

    Couldn’t one argue that the destruction of the value of a fiat currency is caused by bank lending, mostly on real estate, which happens because of the profitability of real estate speculation. If it was unprofitable to speculate on real estate, banks wouldn’t be dishing out ever increasing amounts of money to people to spend on land, and therefore you wouldn’t get infation.

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  • Capital gains tax on the main home is perhaps one of the most ridiculous things I have ever heard. You would completely destroy any sort of worker mobility. Your job moves…oh, well the HMRC will say, that’ll be £100,000 thank you.

    Sure, tax second homes at 40% with no taper relief if you want to discourage multiple home ownership, but taxing the main residence is just a further tax on and above inflation. There are many better ways to stop house prices getting out of control.

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  • mark wadsworth says:

    I love the Home-Owner-Ist bile being spewed out in the comments to the article 🙂

    Oli Kamm is stumbling vaguely in the right direction. He appears to advance two or three arguments, none of which stack up unless you first decide the appropriate tax rate, which can either be 100% or something lower (like 18%, let’s say).

    And 18% rate would just stall the market (as Inbreda points out) because it would add to the cost of moving. And it would not deter sellers from holding out for the highest price they could. Further, if the gain were big enough and you wanted to move, you would be better off by letting out your old home and buying the new one, leading to ever more concentration of housing in ever fewer hands. If our aim is to encourage a wide spread

    A 100% rate would discourage vendors from holding out for the highest price, they’d be happy to sell it for what they paid for it (provided they have kept records of the cost of improvements which is a lot tricker than you think. Under normal CGT rules if you have a crappy old kitchen worth £5,000 and you replace it with a shiny new one for £15,000, your “base cost” only goes up by £10,000, and then there is the question of inflation allowance). So with a 100% rate, if everybody in a chain bought their house ten years ago, they are all happy to sell it for what they paid ten years ago and pay to the next person in the chain what they paid for theirs ten years ago.

    BUT what if you are selling a house you bought thirty years ago for tuppence ha’penny and you are buying from somebody who bought three years ago? It would be impossible for you to move as you wouldn’t be able to bridge the gap. So CGT is a nice idea to get the debate going, but fails on the practicalities – if would be a rough replacement for Stamp Duty which is in itself deeply flawed.

    So the only way forward, as ever, is Land Value Tax. Finding out what the rate “should” be for each postcode sector, in absolute terms, is an absolute doddle.

    You start off with a 1% property value tax, averaged out over square yards (to replace Council Tax, IHT, SDLT, CGT, TV licence etc etc) and then, year by year, in areas where selling prices are above rebuild costs (also easy to guesstimate – you can work on the basis of average build densities x average rebuild costs – discount for wear and tear) you just keep hiking the rate until one day the cash selling price of a each type of home (3-bed semi, four-bed detached; two bed flat; Victorian terrace etc etc) is exactly the same across the whole of the UK.

    i.e. if you want to buy a 3-bed semi, it will cost you no more than £80,000, whether it is in Salford or Hampstead. The only difference will be that the LVT on the one in Salford will be (say) £800 and the LVT on the one in Hampstead will be £15,000 a year.

    Simultaneously, we can take all these tax revenues and phase out really bad taxes like VAT, National Insurance and higher rate tax, and given the political will, income tax/corporation tax would be down to a flat 20% or so within ten years.

    What’s not to like?

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  • mark wadsworth says:

    Oops.

    My third para should end with “If our aim is to encourage a wide spread of owner-occupation, then a CGT rate of 18% on people’s main homes would be counter-productive and send things backwards”

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  • [email protected]: What’s not to like?

    ummm, I don’t like income tax. Can’t I pay more LVT rather than be disincentivised by having my productive income taxed.

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  • mark wadsworth says:

    PON, sure, I was just indicating the direction of travel.

    Ultimately, having boiled down the tax system to LVT plus 20% income tax, you can just keep going (this would take another ten or twenty years), so instead of having (say) £1,000 PAYE deducted from your salary every month you have (say) £1,000 LVT deducted (or less if you live in a small flat or more if you live in a big mansion).

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  • Transaction taxes (of which CGT is an example) are inherently bad for free markets (distort the market and encourage black and grey markets), especially when they get above a tiny fraction of sale price.

    As far as I can tell the second home CGT is actually a crude attempt to punish an unproductive use of a resource
    – it does not actually tax usage (I can buy a house and leave it empty, and I’m not punished until I sell)
    – it does nothing to actually quantify the productivity loss caused by ownership, however it does exclude first homes as having one is much less likely to be unproductive (still definitely possible though / as is the contrary position of owning a productive second home)
    Adding first homes would move this crude approximation move even further away from it’s goal.

    powerofnow – I’m with you there! Income tax is particularly dire.

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  • * would make this crude approximation move even further away from it’s goal.

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  • A facet of my point @16 (Friday, May 28, 2010 11:17AM) is made in one of the comments:
    “””
    Damien Triltmand wrote:
    I am a pensioner ‘house blocker’. I live in a 4 bedroom detached house in a highly desirable school catchment area but am denying a new family the opportunity that my family had. The reason is that it is already far too expensive to move out. The CGT proposal of this article is silly.
    May 28, 2010 10:52 AM BST
    “””

    reCaptcha: censors against

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  • mark w
    Would abolition of VAT really be a good thing? Sounds good on the face of it – a regressive tax after all – but knocking off the 17.5% on (nearly) everything would quite possibly be a golden opportunity for companies to raise the margin on their products. Just as housing benefit benefits the landlords through increases in rents, I wouldn’t mind betting that ending VAT would have a similar effect.

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  • LTF – there would certainly be more margin available for corporates but why do you say that is a bad thing? Wouldn’t it imply markets would become more open to competition (bigger margins -> more scope to compete) and hence (eventually!) better goods and services and better productivity? Furthermore the added competition would have the effect of squeezing margins down. VAT is also a crude approximation to a tax on unproductive use of resources (aiming at over consumption and use of resources on items which are wants not needs).

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  • mark wadsworth says:

    LTF, VAT is The Worst Tax because it effectively punishes and prevents all economic activity on which the gross margin is less than 17.5% (or whatever). I look at company accounts day in day out, and as a verifiable fact, net profit margins are always competed down to about 5% or 10%, so really, their net profit margin is 25% and most of it goes in VAT.

    I don’t see why the tax system should favour Trader A (who buys 50 units @ £100 and sells them for £200 gross = profit of £5,000 and can comfortably pay 7/47 x £10,000 VAT = £1,489) but puts Trader B ouot of business (who, in the absence of VAT could buy 500 units @ £100 and sell them for £110 each = profit of £5,000 gross but cannot possible afford to pay 7/47 x £55,000 VAT = £8,191).

    If VAT were phased out, various things would happen:

    – prices would come down
    – profits would go up and so corporation tax receipts would go up
    – with higher margins, there’d be more new entrants to the market and thus more economic activity so income tax receipts would go up and welfare spend would go down.
    – it would ‘rebalance’ the economy between wealth creating activities (most of which are liable to VAT) and land and finance-based activities (which are largely exempt or zero rated). Think about it – if you pay a tradesman for a nice new kitchen that increases the value of your house by £10,000, there’s a shedload of VAT to pay. If you just sit back for a year and allow you house to increase in value by £10,000, there is no VAT to pay at all.

    The long run fall in tax revenues would only be about half what is collected in VAT (i.e. more corporation tax, more income tax, less welfare), which can easily be collected via more LVT.

    Plus finally, VAT is an EU-imposed tax, all the more reason for leaving 🙂

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  • “The mythology of home ownership diverts resources from investment in companies that make things or provide services.”

    This mythology does not create jobs and does not help this country to compete in an extremely competitive global economy. This is the reason America has withdrawn support for homeownerism and indirectly support for exotic and illusionary financial instruments that comes with it.

    This new government to keep inflating house prices would be suicidal anyway but they will have to explain why it is not good for the economy.

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  • Captain_mandrake says:

    capital GAIN tax…..it’s not like someone is being asked to hand over money they don’t have.

    Make it the same for everyone and then nobody can complain, only people who have a hidden agenda i.e. want to take unearned profits from property speculation.

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  • ontheotherhand says:

    MW. How about CGT on any property bought from now on? That would be enough in my view and is not retrospective. It would not stop the poor old 30yr vintage homeowner from being able to move nor stop any other person who bought until today moving for job mobility. What it would do is get rid of some speculators and help rebalance the economic treatment of investment to help capital to be allocated efficiently. Why should a home get a subsidy compared to everything else? Does anyone believe that the trillions that have been borrowed and ‘invested’ in bricks is an efficent use of capital by the UK public.

    MW re. LVT, have a look at the blogger Fintag today http://www.fintag.com/ He’s a tongue in cheek hedge fund manager who has made quite a few correct calls over the years.

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  • letthemfall says:

    51ck and MW

    I can see the arguments in favour of removing VAT. However, 51ck suggests it would improve productivity and MW thinks prices would come down. I could see prices staying more or less the same, and rather than improve productivity it would transfer more wealth from the consumer to producer and encourage inefficiencies. Since we have seen enormous transfers of wealth to owners of capital in the last 30 years, I think there is good reason to suspect this. What would actually happen, of course, we can’t be sure. But if VAT is a tax on unproductive use of resources, are you not in favour 51ck?

    If we never had EU-inspired VAT, we’d no doubt still have purchase tax.

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  • surely it would also have to apply to MEW? Otherwise people would just borrow against the value of their house while still living there. keeping the LTV high. Then when they come to move there wont be any profit to tax.

    Otherwise there will be complaints that people cant afford to pay the tax – because although they bought it for next-to-nothing, they dont actually have the capital gains with which to pay the tax at the point of selling.

    But then I guess that is their tough luck

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  • mark wadsworth says:

    LTF: “it would transfer more wealth from the consumer to producer and encourage inefficiencies”
    ??

    Most of us are simultaneoulsy consumers (human beings) and producers (workers, entrepreneurs etc = human beings). If you were correct that gross prices would stay constant and super-profits would not be competed away (you are not, but never mind) then the salaries, dividend income and interest income received would increase by exactly the amount of the VAT cut. How does that not benefit ‘consumers’?

    If my more dynamic assumptions are correct, our net incomes and consumption opportunities would increase by considerably more than the amount of the VAT cut (to the extent it is not merely siphoned off by the land market, of course)

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  • LTF said, “But if VAT is a tax on unproductive use of resources, are you not in favour 51ck?”
    – No, it’s a crude approximation which whilst being much easier to implement and administer does not actually do the job.
    Mind you, you surely know by now that I am generally anti-tax (aka legitimised theft) and believe all, if not the vast majority, of public goods are actually providable via free market mechanisms.

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  • letthemfall says:

    MW: “If you were correct that gross prices would stay constant and super-profits would not be competed away (you are not, but never mind)”

    All hail omniscient mark wadsworth, Thane of Uxbridge. Thou shalt be leader of Ukip hereafter.

    We are indeed both consumers and producers, but our production is not always compensated according to value, and nor is the cost of consumption always representative of value. This has more to do with economic power than questions of efficiency.

    51ck: Yes, I’ve twigged that. Can’t believe it would work for a minute though.

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  • inbreda @ 2:44 It doesn’t matter how much equity withdrawal has taken place. The capital gain is the difference between the original purchase price and the eventual selling price. The amount of debt secured on the property has no connection with the gain/profit – but if you have already MEWed away your gain, it will be more painful to find the money to pay the CGT.
    .

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  • mark wadsworth says:

    LTF, it is a simple observable fact that with free markets, super-profits get competed away. VAT is only applied to mutually beneficial exchanges in the free market, therefore hinders the workings of free markets. VAT is not applied to monopoly profits in farming, housing, banking etc. I am not making a political point, I am saying how it is.

    The interests of producers and consumers; the interests of employer and employee; the interests of entrepeneur and investors etc. are very much aligned. Sure, they are fighting over slices of the same cake, but it is in their mutual interest for the cake to be bigger; whereas every slice that the Home-Owner-Ists grab reduces the size of the overall cake that all three parties have to share.

    And while it is nice to indulge in imagery whereby “the wicked capitalist in a top hat oppresses the down-trodden worker”, actually it’s the Home-Owner-Ists oppressing both of them. I’d prefer the wicked factory owner to the NIMBYs any day of the week. If I don’t have the initiative to start my own business (and I don’t), then I’m quite happy to settle for an affordable house and a job in the factory he builds.

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  • ^^ In short home-ownerism a form of rent-seeking

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  • Sounds a bit like pulling up the drawbridge.

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  • mark w
    No I know you’re not being political (I was teasing). Agree with you about the state of things with housing, but I would disagree that super-profits in business get competed away, especially as I observe the opposite – banks, large companies, certain individuals. I imagine you would argue that markets are not as free as they should be, VAT playing a part, and maybe I would agree with that. But I am deeply cynical over whether this is even achievable; I would suggest that recent decades have been an attempt to allow freer markets, with the result we see today.

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