Rachel Reeves’s rather crude strategy is becoming painfully clear. Between now and the Budget she intends to float ideas for so many painful tax rises that, come the day, we will all feel pathetically grateful that only a few of them have come to pass. Her latest suggestion – reported from an anonymous briefing, needless to say – is that the capital gains tax (CGT) exemption on the sale of main homes might be removed for higher-value properties. A threshold of £1.5 million has been suggested. Sell a property for more than that and you would become liable to pay CGT at a rate of 24 per cent on the uplift in value since you bought it.
The exemption from CGT on main homes has become such an accepted feature of the UK tax system that few have ever considered the consequences should it be removed. They would not be comfortable for many thousands of property owners, many of whom do not consider themselves to be wealthy, in spite of owning a £1.5 million property, which in London and the South East can be a fairly modest family home.
What Reeves is proposing would be especially harsh on forced sellers
Firstly, there would be many people who simply would not be able to pay the CGT bill out of the proceeds of selling their home. Say, for example, you bought your home for £500,000 20 years ago and have now had it valued at £1.5 million. Notionally, you have made a £1 million profit and would be due to pay £240,000 in CGT. But you may well have remortgaged the property in the interim to fund improvements, or to invest in a growing business, so you might not actually have £240,000 in clear proceeds from the sale. For business owners who have mortgaged their homes, the consequences could be especially grim if banks realise that the full value of the property against which loans have been secured can no longer be realised. Banks could well call in loans in such circumstances.
What Reeves is proposing would be especially harsh on forced sellers – people moving down the housing ladder because they can no longer afford their mortgage repayments or because they need to free up capital in order to pay off their debts. They could find themselves relieved of much of the capital which they need to rebuild their finances. Such people could end up being repossessed instead. Imposing CGT on main homes would destroy the incentive for older homeowners to downsize – something which Reeves said she wanted to encourage by lowering the rate of CGT on property sales in her last Budget. Who would want to downsize when a lot of capital they wished to free up by the exercise would be gobbled up by the taxman? Many would opt to remain in their over-large homes instead.
What Reeves appears to be considering would distort the market horribly around the £1.5 million mark. In the example given above, the homeowner would owe £240,000 in CGT if they sold for £1.5 million but zero if they sold for £1,499,999. Just like the cliff edge which used to exist with stamp duty before it was reformed, no one would want to sell a home for £1.5 million. There would be a large gap in the market between there and £2 million. The disincentive to sell would, of course, compromise Reeves’ tax take – she wouldn’t actually get the CGT if someone chose not to sell. Nor would she gain any stamp duty on the sale.
My guess is that the removal of CGT on the sale of main homes won’t actually happen and that Reeves has little intention of taking this course. Rather, she has chosen to dangle it before us as a possibility – in order to pave the way for greater public acceptance for the changes she does intend to make: which possibly include higher council tax bills for high-value homes. But it may nonetheless cause a panic among homeowners over the next couple of months as they contemplate selling their homes quickly in order to avoid a CGT bill.
