News & Insights

The Times reports that the government is considering ending the Capital Gains Tax (CGT) relief on primary residences.

The rules currently state that CGT is not payable on capital gains accrued on a main residence, with some exceptions, such as for homes of over 5,000 sq m or properties that are partially rented out.

It has been reported that the government is thinking of removing the allowance from the most expensive properties in the autumn budget. The Times says that Treasury discussions are continuing over thresholds, but the government believes it will raise a significant sum.

Capital Gains Tax is currently payable at the rate of 18% for lower-rate taxpayers, and 24% for higher-rate taxpayers.

A potential drawback is that a tax aimed at properties valued at £1.5m or more would negatively affect those in London and the South, where 11% and 4% of properties cost over that amount, respectively.

Colleen Babcock, property expert at Rightmove, said:

“In essence this would predominantly be a tax on the most expensive areas of London and the South East. The London market is already feeling the effects of taxation more acutely than other parts of England, and this is likely to deter some moves at the upper end. While our data shows that only a small proportion of homes for sale are in this price bracket, alongside the proposed stamp duty changes, it could be a double whammy for the capital.”

Those opposed to the move suggest that introducing higher taxes in this way could deter older homeowners from downsizing. Paula Higgins, CEO of the Homeowners Alliance said the idea was ‘an attack on homeowners’, stating that:

“The government needs to tread carefully. Uncertainty around property taxes causes paralysis in the housing market. We’ve just seen how damaging this uncertainty can be: in April this year, when Stamp Duty thresholds changed, transactions collapsed by 64% in a single month – the sharpest fall on record. Homeowners can’t afford a repeat.”

Tom Bill, Head of UK Residential Research at Knight Frank, said:

“One key question is when any gains would be calculated from. Based on the last decade, I’d be surprised if there was anything to tax at the top end of the property market, given that prices in prime central London are down 20% over that time.

“A tax that reduced demand further would therefore also affect the prospect of future gains and could be self-defeating.

“If CGT applied from when the property was last bought, it would divide sellers into two groups – those sitting on a gain and those who are not. Anyone with a taxable gain would think twice before selling, which would reduce transaction numbers.

“The government seems to want a predictable flow of revenue that is skewed towards the wealthiest homeowners. That would be best achieved by re-banding council tax rather than introducing transaction taxes that change behaviour in the most discretionary part of the property market to the point they fail to raise what is intended.”

Simon Brown, CEO of Landmark Information Group suggested that it would be preferable to make moving house easier, which would increase transactions and taxes raised, saying:

“Any tax that rises with property value risks slowing the housing market even further. If downsizing becomes less attractive, larger family homes stay off the market and transaction volumes fall. This reduces overall movement in the market upwards and downwards, and not only reduces choice for families and first-time buyers it also hits the Treasury by shrinking the tax base.”

The real answer is to create a more liquid market. When moving is easier and less costly, households can find the right homes, developers get clearer signals about demand, and the Exchequer collects more through higher volumes of transactions. A faster, more streamlined housing market is better for families, for business, and for the public finances.”

Potential abolition of Stamp Duty

In addition to potential CGT changes, the Guardian reports that the replacement of Stamp Duty is being considered. A national property tax would be used instead, with a possible threshold of £500,000, with the suggestion that it would be payable on properties sold for more than this amount.

Stamp Duty currently brings in around £11.6bn. Criticisms of the tax include the suggestion that it makes people reluctant to move, slowing the property market.

Another alternative would be to charge owners on an annual basis. A report by Dr Tim Leunig for the centre-right think tank Onward suggests that a tax of 0.54% could be levied on homes valued at between £500,000 and £1m when purchased, with a higher rate for properties valued at more than £1m.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.