In a potentially serious development for property investors, the Office for Tax Simplification (OTS) has suggested fundamental changes to the UK capital gains tax system. Politicians are looking for innovative ways to replenish funds, with hundreds of billions of pounds paid out with furlough and other Covid support schemes. How might suggested changes to the capital gains tax system hit private landlords and property investors?
The current capital gains tax system
Assuming you have used your annual capital gains tax allowance, the capital gains tax bands for the tax year 2020/21 are as follows:-
- 10% rate on capital gains (excluding residential property) if overall annual income is up to £50,000
- 18% rate on capital gains from residential property if overall annual income is up to £50,000
- 20% rate on capital gains (excluding residential property) if overall annual income is above the £50,000 threshold
- 28% rate on capital gains from residential property if overall annual income is above £50,000
This advice from the OTS is as controversial as it is one-sided. Property investors already pay an additional 8% on capital gains on property investments. At this moment in time your residence is exempt from capital gains, although there have been rumours of changes in this area as well!
Suggested changes to the capital gains tax system
The change is fairly subtle but will have a huge impact on property investment in the UK. The OTS believes that the capital gains tax system should be disbanded, and all gains treated as income. At the moment:-
- Those with an income of between £50,001 and £150,000 pay 40% tax on this band of income
- Those earning over £150,000 will be charged 45% on this income bracket
As a consequence, property investors/landlords taking on significant property developments could see a huge increase in their income tax as a consequence of property profits. Those who follow the property market will already be aware that profits from those deemed to be “trading” in property are already classed as income. Using government data for the tax year 2017/18, we know that £8.3 billion of capital gains tax was paid against £180 billion in income tax.
Could this decimate the UK property market?
The UK already has one of the most expensive property investment markets in the world, when looking at taxation and additional charges. Basic rate taxpayers, who manage to create significant property gains, could see an increase in their tax rate from 18% to 40% or even beyond. While some will suggest this is scaremongering, the facts are there. The OTS has already made these recommendations to the UK government, whether they will take them on is a whole different matter.
The consequences of ditching the capital gains tax system and reverting to income tax across the board could be huge. We would likely see a deluge of private landlord property sales ahead of any change in the tax system. This could conceivably depress UK property prices at a time when the market is already struggling. It would also create a scenario where private investor investment in UK property was just too expensive. Profit margins would fall; housing stock would reduce, with greater dependence on already diminished local authority social housing. This is occurring at a time when the UK government has been promising huge investment in low-cost/social housing, without actually delivering. A similar trend to governments of the last 20 or 30 years!
Quite why the Conservative government would look to alienate its traditional voting base is unclear. Yes, there may be a short-term increase in property related taxes but this income stream would be significantly diminished in the medium to long term. Everyone appreciates that the UK government is in a difficult situation. UK government debt is now beyond £2 trillion and the financial books need to be balanced. However, the furlough system and other Covid related support schemes have helped tens of millions of people and many businesses. Why is it that property investors, often incorrectly classed as “wealthy”, are the ones expected to pay back the lion’s share?
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