Shut the shelter
George Osborne, the UK’s Chancellor of the Exchequer, will present his annual budget on March 20. To maintain credibility he needs to stick to his austerity agenda. To tackle debt he needs to protect tax revenue. To maximise revenue, and appease recession-restless voters, he needs to promote economic growth. He could do all three by stamping on the UK’s property transaction tax and closing a loophole: capital gains tax (CGT) is not currently levied on owner-occupied homes.
Such a switch could double the government’s take from residential property taxes. As important, it could propel GDP, since new homeowners are enthusiastic repairers and refurbishers, but stamp duty – which is levied on buyers – restrains them. Replacing it with CGT could kick start transactions. With careful setting of thresholds and rates, moreover, CGT could be a more progressive levy, one that gathers more tax on the more wealthy. And since CGT takes a share of sellers’ accrued profit, rather than being a tax on ownership, it should be easier to swallow.
The UK government raises about 4.5 billion pounds a year from about three-quarters of a million property purchases valued at 125,000 pounds and above. The Breakingviews calculator shows that the tax take would double to more than 9 billion pounds a year if CGT is levied on homes at thresholds similar to the current stamp duty regime. If the Chancellor decided to collect only the same amount from CGT as from stamp duty, the least-ritzy two-thirds of homes could be exempted from the new tax altogether.
There are two difficulties. First, the politics of residential CGT would be tough, since the exception is much cherished by voters, and many will feel mugged by a new tax on old gains. But at least both the opposition Labour Party, and the Liberal Democrats, the junior party in the coalition government, have endorsed “mansion tax” levies. A flat 1 percent fee on home values in excess of two million pounds would raise about one billion pounds a year.
Second, flat house prices would lead to lower future tax revenue. But that is a problem for another government.
Good financial decisions often require political courage. The replacement of the economically stultifying stamp duty with a sensible capital gains tax on owner-occupied UK homes is a good enough idea to be worth enduring some political pain.