The Government’s desperate search for ways to pay for its lockdown policies is exposing what has been clear for some time; that it has lost its conservative ethos of supporting businesses and being the party of low taxes. It is not surprising, then, that although Rishi Sunak allegedly tasked the Office of Tax Simplification (OTS) to come up with ideas on how to “simplify” Capital Gains Tax (CGT), they seem to have interpreted the remit as an excuse to propose ways of increasing the tax.
In essence the OTS has suggested approximately doubling CGT from 20-28 per cent to 40-45 per cent for higher rate tax-payers; a proposal which would make the UK an outlier for high taxes on capital in the international arena. The tax expert Miles Dean suggests here that this hike would “result in wealthy foreigners shunning the UK, wealthy Brits leaving and the Conservatives signing their own death warrant”. There is some truth in this, but increasing taxes for landlords and second home-owners fits the Government’s populist agenda to woo Red Wall voters, adopting quasi-Labour Party policies and emphases.
Of course, if the OTS was genuinely impartial, the simplest and most obvious idea would be to have a flat rate tax of, say 20 per cent, on the gain from the sale of all properties, including main residences. The fact this was not proposed is evidence that they were working within implicit political parameters.
However, if Rishi Sunak hikes CGT and also increases corporation tax, as has been mooted, this will show the Government’s disloyalty towards British business. Before taking this step, he and the Government would do well to remember that when business people, including landlords, invest their own money in providing a product or service, they take a big risk. In the case of landlords, their asset may lose value, they may face unexpected costs and/or they may face customers/tenants who don’t pay. Paying a lower rate of CGT than income tax implicitly acknowledges this higher risk.
It is also not clear whether they have any handle at all on the taxes private landlords already pay. I can help put them in the picture by outlining some of the property taxes landlords already face, even before proposed Budget hikes, using the following example of someone with one rental property. Remember, the majority of landlords are in this category.
If a landlord bought a property in 2001, paying £90,000 (with an 85 per cent Loan to Value mortgage) they could have received an average rent of £1,100pm for 20 years. Mortgage interest over that period would be about £500pm; maintenance, insurance and voids would come to £100pm, leaving £500 profit. Taxed at the higher income tax rate of 40 per cent, this means £200pm or £48,000 over the 20 years in income tax.
In 2021, the landlord sells the house for £220,000, meaning a capital gain of £130,000. Ignoring any allowances (the OTS has suggested all but abolishing them anyway), if the landlord paid the current higher rate of 28 per cent CGT, they are taxed £36,400. The landlord puts the remaining £93,600 in the bank and at a later point, dies. IHT is charged at the rate of 40 per cent, that is £37,440.
The landlord or their estate would have paid £73,840 of the gain to HMRC, with just £56,160 remaining in the landlord’s family (not counting the £48,000 income tax paid). And the OTS thinks this is not enough?
The amount of CGT demanded by the state also takes no account of inflation. Between 2001 and 2021, annual inflation was 2.73 per cent, producing a cumulative price increase of 71 per cent. The buying power of £90,000 in 2001 is therefore the equivalent of £154,000 in 2021. With our scenario above, even under the current system, CGT should only be payable on the difference between the sale value of £220,000 and £154,000. 28 per cent of the £66,000 actual gain would be £18,480 (about half of the £36,400 currently charged).
Indeed, almost in an aside, the OTS proposes “reintroducing a form of relief for inflationary gains, that is, only tax the level of gain on an asset above and beyond general levels of inflation.” This implies landlords have been paying over the odds for years.
They’ve certainly been paying over the odds in an international context as well. In Germany there is a system similar to the one abolished by Alistair Darling, whereby if a rental property is owned for 10 years, the landlord, instead of paying £36,400 CGT as in the example, or even more as the OTS is suggesting, pays zero. No wonder Germany has a much larger private rented sector than the UK.
What’s more, these tax policies cannot be seen in isolation. The extent of the UK Government’s attack on landlords was severe even before the pandemic, as I wrote here two years ago. For landlords the most shocking move was George Osborne’s notorious “Section 24”, announced in 2015. I have written extensively here on this “Alice in Wonderland tax”. In a nutshell, it means landlords now pay tax on the mortgage interest paid to the lender as though it were profit when it is in fact a cost. It is a ruinous and absurd tax levy.
If this wasn’t enough, recent years have seen various other discriminatory fiscal measures, such as a higher rate of CGT for landlords at 28 per cent and a 3 per cent levy on stamp duty. Since the beginning of the pandemic, further “anti-landlord” policies have followed, as I explained here.
Particularly damaging have been the repeated eviction bans, meaning many landlords have faced no income for a year or more from the most egregious non-paying tenants. Additionally, there have been some measures which could lead to landlords housing tenants indefinitely with no obligation on the tenant to ever pay the rent, as I wrote here. I have calculated that this could reduce a pensioner with one rental property to having to live on £50 a week or less, with no eligibility for financial help. Landlords also now face £30,000 fines from councils for innocent mistakes/omissions in paperwork.
This is the hostile environment in which landlords are now operating, even before this news — that they and other businesses might have to contribute an estimated £14 billion to pay for the Government’s lockdown measures.
The Conservatives would do well to realise that if they go ahead with this, landlords will take whatever evasive action they can. Many will batten down the hatches and not sell up for years — in which case the Government will receive only a fraction of the tax predicted.
Here’s a novel idea: why not do the opposite instead and treat landlords fairly? Why not bring back taper relief, exempt inflationary gains and “simplify” tax by getting rid of the 8 per cent CGT levy introduced by the vindictive George Osborne? Such a positive approach to taxing landlords would be likely to increase sales and probably bring in far more revenue than a huge tax hike ever would.