There has been a deluge of support for arguing that we should realise that choosing competitive and fair rates of CGT is the way to maximise the tax take and to encourage saving and risk taking. Just a few have written in to demand higher taxes on buy to let property.
Let me explain why I do not agree. We need a decent supply of rented housing in this country. In the next few years there is going to be precious little money to provide additional public sector rented accommodation – as the ex Chief Secretary to the Treasury rightly said “There is no money left”. We will depend on private sector rented homes for the extra we need.
There is growing acceptance that there needs to be generous exemptions from CGT for entrepreneurs who make risky investments to create jobs and provide facilities to the public. It will be difficult if not impossible to design such exemptions in a way which excludes someone from setting up a lettings business in a company format and enjoying such exemptions.
The only people likely to be caught by a high CGT rate will then be the smaller saver and owner of a modest buy to let property. One such family’s case came to my surgery yesterday. The lady said three of them had inherited a single house. The IHT had been paid. There was now a gain on the property which they would take when they wished to sell and distribute the cash to the three beneficiaries. High CGT would mean a second tax on the same inheritance. Many of my correspondents have single properties which they bought to provide them with capital for their retirement but did not place wihtin a pension plan. If they are taxed too much on the sale of the home they may need top up benefits to their pensions. Why must we penalise the saver and the prudent?
I do not accept that the purchase of homes to rent out is the prime cause of house price inflation. I agree with those who say housing is too dear, and too many struggle to get onto the housing ladder. As I have often explained on this site, that was brought about by the crazy monetary and credit policies of the decade up to 2007, when too many mortgages were available and when banks accepted ever higher multiples of the price and of incomes. To get house prices more into line with incomes we need saner credit and monetary policies. Deterring private rented accomodation will be insufficient to slash house prices, but will put rents up.
May 29, 2010
Buy to let really can't be the driver of of house price inflation considering it represent less than 2% of the market.
And don't let anyone tell you it is a risk-free, one-way bet either. These things are management intensive, heavily regulated and prone to a protracted and ongoing legal process when you try to evict difficult tenants under the "acceleterated" procedure" A short demonstration if I may?
Mr Landlord has spoken to Mr Tenant about his rent arrears on say January 1st and despite verbal assuarances, Mr T is still in default on February 28. So Mr T decides it's time to get his property back. He serves a section 21 notice which requires two months notice plus the balance of the remaining month be given, so we will say he asks for possession May 15. Mr T ignores this so Mr L (knowing that any appoach now will be seen by the courts as criminal harrassment) serves papers with the county court requiring possession. Assuming he has got the notoriously complex form correct (yes UNITE we all have to get the forms correct!), within about a week the court serves papers on Mr T (and pays the £150 court fee). He then has 14 days to respond to the form. The court can then grant a 14, 28 or 42 day possession order. Having been to the CAB, Mr T pleads hardship, (his goldfish having recently died) and the court awards a 42 day possession order. This puts in mid August. Mr T ignores the possession order and again if Mr L contacts him he risks prosecution as before. So back Mr L goes to court seeking a baliff to enforce the court order (and pays the £95 fee). Again with administration and time for Mr T to respond, we are into September. Mr L finally can employ a baliff to evict Mr T, who usually hops the night before leaving just enough of his stuff to force Mr L to put it into storage and advertise it's disposal. He's also not left a forwarding address for Mr L to serve papers to get the debt back and lacks the assets to make the enforcement of a CCJ worthwhile anyway. He also probably hasn't been too careful with the way he has treated the place, and it now requires significant repairs and redecoration.
In addition to his court and balliff fees, Mr L hasn't been paid any rent in the nine months of the 'accelerated' procedure. So you will understand how people like Mr L find it a tad galling when the PM wants to take half of his capital appreciation (non-indexed) and tells him that he's really not very good for society, and what was his commercial risk, especially when he knows that Mr T would not be housed by the council as he isn't a priority need and if the PM forces Mr L out of the market, he'll just end up trying to create more state-owned and run social housing ~ hardly a tory objective one would think!
May 30, 2010
Buy to let accounts for about 12% of outstanding mortgages by number (and more by value, because BTL has grown substantially over the past decade) according to the CML.
June 2, 2010
Sorry for the delay in my reply, I was getting a 404 error for a few days. It seems my figures somewhat underestimated the scale of the market.
May 29, 2010
You seem to be saying we should use the tax system to engineer improved availability of private rented housing. I can understand the need but it seems to me all such plans end up with unintended consequences.
You are saying to investors: "buy property to let and you will be rewarded with a good low tax capital gain". It is not difficult to imagine that this will lead to another property bubble as people try to cash in.
May 29, 2010
Spot on John.
I paticularly like that you recognise that it was not the buying of properties to rent that caused house price inflation.
I remember trying to buy my own home when house prices were going through the roof and it was other owner occupiers that I was competing with, not buy to let investors. I know this because I live in the same area and have met the owners of properties that I missed out on.
Further the private rental sector has remained consistent at about 10% of the countries housing stock for the last thirty years and is not big enough by itself to move the housing market.
May 29, 2010
My information suggests the private rented sector is not close to 10% but I maybe wrong?
May 29, 2010
"I do not accept that the purchase of homes to rent out is the prime cause of house price inflation." Housing as an asset class receives preferential fiscal treatment. Meanwhile savers in stocks and shares pay stamp duty when they buy and capital gains tax when they sell. Why should housing be treated differently? Preferential fiscal treatment has led to house price inflation and far too much of the nation's wealth is tied up in this non-wealth producing asset class. Buy-to-let investors are only jumping onto a bandwagon that has been fiscally distorted for years. Of course we need saner monetary and credit policies, but we would have them if housing is taxed fairly along with other savings.
May 29, 2010
There's the problem in a nutshell: you restrict credit to stop house price inflation and you also put up the price of money for entrepreneurs and their customers.We need loadsa money without
house price inflation answer :Keynesian stimuli plus a tax on housing to block cheap money being diverted from goods and services .You and other rebels have chosen to leap ,with unusual rapidity for Conservatives, onto a single change (back) to CG tax .This shows little loyalty to a Conservative Prime Minister dealing with the problems of assuming power and balancing a coalition.But above all it shows a determination to shore up house prices which is not in the national interest.If the mere suggestion of CGT changes were to bring more houses onto the market and dilute average prices,this would be a good thing.
May 29, 2010
I agree with you, long term savings should not be taxed or many people will not save and invest in the country. Fly-by-night oppotunistic investment on the other hand deserves taxing.
I wonder – as an average family with a small share portfolio built up over some years but not in a pension scheme – how share sales fit into your plans. Basically in your CGT ideas you are taxing 'short-termism' and encouraging long term planning and committed investments, just what is needed especially in volatile markets. But you realistically can't make traders hold shares for years!
May 29, 2010
Sorry but your thinking is unusually muddled on this issue, I think biased by your constituents' narrow interests. This is one area where by listening to people on your blogs and changing your mind you could make a difference.
Residential housing presents a special case and that we should be actively discouraging speculative activity within it. The fact that residential property is a special case is clear from the fact that both here and in the USA residential mortgages were the main cause of the private debt crisis, and not borrowing to but shares, gold or other assets.
Bear in mind that notwithstanding IHT, which is a separate issue, your constituent will already have made an inflation-related rental income whilst they own the property, then a tax-free inflation-related gain when they sell it. All that I am arguing is that they pay CGT as a portion of the EXTRA, ABOVE-INFLATION gain, which is related to the extra ABOVE-INFLATION price that "Mr and Mrs Younger" have to pay for the property. And Mr and Mrs Younger just want a start on the ladder, not a cherry on the top of the icing on their rental income cake. I would even suggest that this extra tax could be used as a subsidy to "Mr and Mrs Younger" via a MIRAS-type scheme, rather than to take below "£10K" earners out of income tax, which in my view disenfranchises them, but that again is another argument.
You really need to think this through from more than a retiree's point of view (and that's coming from a close-to-retiree). It is unwise to allow runaway price inflation for whatever cause, whether monetary, speculative or whatever. The answer to your supply-demand imbalance in rental property is loosening up planning restrictions. Residential property can be covered by a CGT rule whether it is owned personally, by a Company or Pension Scheme. Just as cars are a "special case" within the VAT and write-down rules for trading companies, so can residential properties be the special cases.
May 29, 2010
BTL investors are not heroes. They charge more for rent than a mortgage thus trapping people who are unable to accumualate deposits.
In a country where an annual net immigration of 400,000 is helping to drive down wages and home loans have been hard to come by, how else are house prices being driven inexorably upwards ?
May 30, 2010
For those that say landlords own property that needs to be sold to owner occupiers. There is an answer to this. Most of my tenants are in their 20's & are only in the city, Southampton in my case, for a year or two as they progress through their careers or education. They therefore do not wish to buy. It's therefore vital that rental property continues to remain available to such people.
People seem to think landlord's are raking in easy money. If it's that easy why isn't everyone doing it. There are hassles, worries & risks just as with any other business. For the 1st 10 or 20 years most of the rent goes to pay the mortgage/s & maintenance costs so during this period the landlord will see little income in return for all this worry & risk.
People need to stop bashing landlords who provide vital accommodation just as much as hoteliers do.
As it is landlords don't have the tax free sum when they sell their properties to retire, which is something that hoteliers do have when they sell along with everyone else who has a tax free lump sum when they draw their pensions.
Higher CGT will have to be accompanied by the re-introduction of taper relief or indexation.
If property prices are high it's due to over population & lack of house building, not due to landlords. Too many people & too few homes in this most densely populated country in Europe is bound to result in homes that are difficult to afford for the average person.
Any re-intoduction of Miras or any other assistance to raise the purchasing power of buyers will simply send prices higher by the law of supply & demand.
May 29, 2010
CGT should be the same as income tax, invest in shares/business for the income and not the capital gain. CGT is just a tax avoidance scheme.
Also why should house owners have another advantage, they already have the Bank of England bailing them out with ultra low interest rates and QE thus screwing the savers. House owners should fund the bailout.
May 29, 2010
Dear Mr Redwood,
yet again I read from you that which I am not able to put down on paper myself. I am not clever enough.I hope that DC realises what he is missing from the cabinet.
I am 58 and a married man. I truly have no, and never have had, any prejudice toward homosexuals. If David L. chooses to live privately in his own way that is fine, simply not an issue to me. However, were I to see the Chief Secretary taking 40K from the public purse in the manner in which he appears to have done would be shocking and demand a very quick response from D.C.
How long will it be before he claims that he has "done nothing wrong", "it was all done within the rules"……oh dear, here we go again?
I see a link here, and an opportunity for DC to get a top man into the treasury. We need you in the cabinet,
very sincerely,
Steve Hunt
May 31, 2010
Except that he, not unlike the Labour disease, thinks house price inflation is a good thing, but will never admit it.
The coalition will lead to another load of people priced out of the housing market.
You will never be able to trust any politicians. They are all out for themselves.
May 29, 2010
Buy to let does raise the price of housing (due the the mass stampede which caused a bubble) and it traps young people in rented accommodation without leaving them enough money to save for their own house. Houses being as overpriced as they are, the rents are steep and ironically often don't cover the actual costs as a lot of landlords are terrible at business and manage to lose money. Most would make more money had they picked another investment!
However, far worse is the generous housing benefit which puts a floor under rents — meaning that not only are claimants trapped by high rents they would have problems to pay had they a normal job, but also, it costs the working young people a lot of their wages to compete with the DHSS claimants, herding them into poverty and making them share a house with strangers, instead of being able to settle in a home and have kids.
May 29, 2010
I totally support john redwoods campaign. The concept of people investing their already hard earned money in property to try to take responsibility for their own future and pension should be encouraged not taxed punitively. What is the alternative-wait for the state to take responsibility for us? An angry conservative voter
May 31, 2010
I totally oppose John Redwood's campaign. The idea of middle-aged people using their financial clout to deprive young families from being able to buy a home of their own is morally repugnant. Buy-to-let should be taxed out of existence.
An even angrier (and most likely younger) conservative voter.
June 1, 2010
worse the savers of the country are subsidising the mortgage holders
May 29, 2010
I tend to agree. We rent and although I would like to buy at some point (for stability more then any notion of investment) houses are far too overpriced. Renting works for us because we live in a nice house we couldn't possibly afford to buy.
CGT on, say, second homes would be welcome if it brought house prices down, but hitting BTL investors is a double edged sword. There may well be a glut of cheap properties hitting the market, but there may also be a shortage of rentals and rent may be pushed up.
I'd much rather see stricter laws in favour of tenants, for example longer contract terms, 2yr, 5yr, 10yr, etc. decided by the tenant, under which the landlord cannot sell or increase rent. Allow tenants to decorate, make a home, etc. etc. This would focus BTL investors on running a proper business and force out the amateurs and the greedy.
If the aim is to decrease house prices (which I don't think it is) then build lots of cheap housing instead and sell at 30-40% below current averages. But if it is about taxing fairly, by all means we all want to see everyone, including the rich, paying their share but this must be without the negative side effects to the rental market or business in general.
May 29, 2010
CGT is a double edged sword on the one hand if it restrains house price inflation or even deflates house prices that is a good thing as it will force personal debt down to manageable proportions and go a long way to avoiding future booms and bust. Also if it plugs the loop hole that allows some to use it as a means to avoid paying income tax that is also beneficial. If it depresses savings and investment that will be bad for the economy. I suspect that Osbourne will present measures that take account ofall these factors, he has already said that it will not effect business and enterprise. However if he does then increased tax raising from CGT to fund higher levels of personal allowance will be minimal at best. The dexterity at which Osbourne tackles this CGT problem will point to whether he is going to be a good and able Chancellor or just an also ran. Laws has proved to be an able and astute lieutenant for Osbourne and between them I believe they can pull out of the hat a magic formula to tackle the CGT conundrum. If Laws recent expenses embarrassment forces his removal from the treasury then the government is going to be all the weaker for it. This is now the time for the government to use the mendacity and obfuscation that Campbell and Mandelson are past masters at and have so often used so well in the past to shield their colleagues from being hounded out of office to keep Laws in his.
May 29, 2010
As you are no doubt aware the NLA is campaigning intensively for CGT increases not to apply to the lettings industry. For my part I can see why, if we are talking about landlords who are in it for the long term and providing a good service and badly needed housing to the private rental sector.
On the other hand, lettings is, like a number of other elements of the residential property market, completely unregulated, with letting agents being able to open and close at will on any high street with no records of them being kept. Apparently there is is already talk of how to get round any CGT by registering empty rental property in a personal name, driving licence, council tax etc then sell in a year's time.
I have no idea as to how to separate the long term investor from the 'quick buck' merchants because the residential property market continues to be left to 'self regulation' and the trade associations only cover a tiny percentage of the number of landlords in operation.
I do feel however that there are two distinct sides of the coin and both have to be considered.
Kind Regards
Miss Sharon Crossland AIRPM
Leasehold Life
May 29, 2010
The country certainly needs a well run buy to let market but I fail see how generous capital gains allowances serve this end.
The rental market needs to be run by well managed businesses with sound balance sheets and a clear knowledge of the law and business ethics. Sadly, far too many participants in this market are a motley crew of dangerous amateurs.
In recent years we have seen unprecedented levels of price ramping, speculation and flipping. Such activity is linked to capital gains and has nothing to do with income gains. The buy to let participants have been major offender by virtue of their greater financial leverage.
It does not escape my notice that many 'good Socialists' and 'good Tories' have strings of buy to let properties to thank for their comfortable life styles. If the same people had invested their money and influence in technology companies, the country would be a happier place today.
May 29, 2010
Small point. You can't put domestic property, houses, flats etc into a pension plan, a SIPP. Small commercial property, yes.
The fact that taxes are so skewed in favour of property in the uK encourages people to buy a house as a pension. This is daft from a diversification point of view, but makes sense because of the tax bias. Better to properly reform taxation to tax labour and capital less and land more. Why do we tax so highly the two true wealth creating factors of production – capital and labour – and the third, land, so lightly? I hope that this CGT debate moves outward into a proper debate on the whole way we are (over)taxed.
May 29, 2010
I agree entirely.
Plus, must add that increased rents will hit the poorest the hardest, especially when this government is undertaking a root and branch reform of the benefits system to encourage people to go out to work.
Maybe you need a system which encourages private landlords to enter the social housing system and be able to take advantage of repairmen etc from within that closed shop, which reduces the landlords costs to benefit the tenant.
…and ultimately benefits every tax payer through reduced housing allowance.
May 29, 2010
Cannot say I agree john
Although I have many great friends who are now rich from being in the buy to let game over the last 20 years, and who have made so much that they will be immune from any house price crash or similar, and I genuinely love them to bits and respect their true entrepreneurial spirit and they have taken the risks so the rewards should be theirs – however
Having said that the private rented sector needs urgent reform in the UK, the balance has swung far too far in the landlords favour, it is impossible for tenants to get long term security of tenure – and there needs to be a fair balance of this available to bring families up with the security kids need etc, there is little chance of bringing genuine grievances against bad landlords as they can always hold the gun of not renewing at the next 12 month renewal at your head, and the genuine mobile workforce who move from town to town and stay for 2 months in one place and 8 months in the next are very badly served by routine contracts which only break at 6 or 12 months.
I would rather see large companies entering the rental sector, if we had the equivalent of travelodge and holiday inn companies running rented houses with an ethos and a reputation to protect and genuine competition which is tied to a brand then that would help, but this would need the unfair competition from the state sector (council houses and housing associations) sorting out
In other European countries its perfectly easy to rent a house in the private market where you know your kid will be able to do the 5 years of school without the landlord pulling the plug, and at the same time if your job circumstances change the landlords are perfectly amicable when you need to leave early, none of this is possible in the UK
Also the estate agents running many rental properties on behalf of landlords are largely out of control, they have no consistent training, the standards vary widely, and outrageous fees are often charged at the last minute when it comes to contract renewal when it is too late to look for somewhere else
I don't understand your getting taxed multiple times on the same money argument, the same applies to shares and so on, why not houses? If my dad buys some shares with money he has already paid 40% tax on, he dies and I get them and pay inheritance tax on it, and then they go up in value and I sell them then I pay capital gains tax? Why should houses be any different? We all pay tax on the same money multiple times I'd love to see it stop but it isn't going to and houses should not be an exception
I would be in favour of tax breaks to landlords who do a particularly good service to the community, and are at the better end of the spectrum at maintaining their property and so on, I would do this by giving them a tax discount based on tenant feedback, give them incentives to improve their customer service which don't really exist at the moment as hardly anyone knows their landlord when first taking on a tenancy
If I were to rent out houses I would be happy to pay tax the same as any other business, and I don't think the family who came to your surgery deserve special treatment of any kind
On the other hand I don't see why some rental property (or percentage of it) should not be able to be held within the tax shelter of a pension fund wrapper with the same limits and checks applied to all other pension holdings, i.e. only so much as a percentage of your income and lifetime limits and so on
So don't think you're making a joined up argument
May 29, 2010
To say buy to let had no effect on house price inflation is simply wrong. Investors on mass targeted first time properties with their unfair tax advantages. We couldn't compete and prices rose fast as interest rates were kept to low and credit became ever easier to lend. Many time I went to building sites to be told they have all been bought by investors.
Years on I am still pretty priced out of the market. This 40% CGT represents hope for my generation and future generations owning property. When the papers constantly say there is a shortage of houses why is it fair that a few own vast portfolios of properties with little financial lay down of their own.
This tax increase is really needed, it represents hope.
May 29, 2010
Some random thoughts on this issue:
1. I do not pretend to understand all of the factors that affect house prices, but I would imagine that immigration is one of them?
2. If “buy to let” is a factor, it may be due to mistrust of the pension system, which has become overly complicated, thereby inducing people to look for alternative ways to make provision for their retirement.
3. The government’s objective should be to raise revenue and reduce (preferably eliminate) the deficit, and if this can be better achieved though lower CGT rates then so be it. I have the feeling that the idea of raising CGT rates has more to do with punishment than revenue raising.
4. If the government want a slice of profits made by risk takers, then they should take a slice of losses too.
5. If an individual wants to sell a house they get a PPR exemption.
If a business wants to sell a property it gets rollover relief.
If a trustee wants to sell a property, for example a house and buy a couple of flats instead in order to achieve better rental returns for the Trust, the sale will be subject so CGT, and therefore will diminish the value of the trust. The Trust should surely be allowed rollover relief in the same way that a business is?
May 29, 2010
John
I am planning to retire next year. A large part of my funds are in shares I have purchased over a period of 15 years. Your idea to stage tax is brilliant and would not penalise this type of savings. The government plans are not at all fair. They must listen to the ordinary people. Keep the pressure up John, they must listen to reason.
May 29, 2010
You are probably right, but let me try to argue the point.
I'm hearing lots of arguments about how the change will effect this or that, but no real justification for why CGT rates should not be the same as Income Tax. Lets assume that you were starting with a blank piece of paper. Why would you create CGT in the first place?
If you invest money in housing you get two forms of payback, Rental income and capital gains. They are both gains in money from the investment, they just occur at different times. In a neutral tax system the rates would be the same. What is the argument for saying that the capital gain is different and should be taxed at a lower rate than rental income?
I guess the same question can be asked about allowances, but I see the benefit in having a separate capital gains allowance to take small gains out of the tax system to keep it simpler.
>>no money for public sector housing
Even if there was, the public sector should not be in the business of building or owning housing, the private sector can do a better job of it.
>>We need a decent supply of rented housing in this country.
The problem is not the supply of rental accomodation, it is the total supply of accomodation.
>>I do not accept that the purchase of homes to rent out is the prime cause of house price inflation.
I agree. As well as the availability of cheap credit, we have an inefficient market where the link between supply and demand is broken. House price inflation is caused by a difference between the supply, which grows slowly due to planning regulations, and demand, which has been growing faster (largely due to immigration).
If we accept that there is a need for more housing and that we want to use the tax system to encourage the construction of new housing then we we really want is lower tax for new builds. However, there is nothing in this argument that says we need a lower capital gains tax, but lower tax for both capital gains and rental income.
Another problem we face is that housing needs are changing. More people live alone but the stock of smaller (hence cheaper) accomodation has not matched this change in usage. We should also be encouraging the construction of more efficient housing (because energy will be more expensive in the future, not because of global warming). These are more reasons for encouraging investment in new house building rather than in the existing housing stock.
What if we gave a big tax cut on the profits from building or renting a new home for the first ten years of it's existance. Stagger the cut so it is highest in year 1 and decreases to 0% in year 10. Surely something like this would encourage a house building boom which would kick start the economy and create lots of new jobs. It would probably generate a bigger tax take overall because of the increased economic activity.
>>lettings business claiming entrepreneurs exemptions
This is a good point, but entrepreneurs exemptions should be targetted at companies that generate wealth. We want companies that employ people or make things, not companies that hold static assets and hope that they increase in value.
The market would be more efficient with larger, professionally managed letting companies rather than lots of individuals owning one or two rental properties. Individuals could still invest in these companies to save for retirement. Doesnt the UK already have REITS? http://reits.taxworld.org/
>>IHT/CGT double taxation –
If this is true then it is a problem with the existing system anyway and should be fixed. It is nothing to do with CGT rates. CGT should only apply to increases in value after the ownership has changed.
>>Existing owners of buy to let investments
These changes should be introduced over time not in one go.
I see CGT as a similar issue to the Mortage Interest Relief in the 80's. MIR was usefull policy to encorage a certain outcome (i.e. increase the owner occupied housing) but once that outcome has been achieve it distorted the market and had to be removed. Make changes in the wrong way (e.g. Lawson's 88 budget) and you harm the economy, but make changes carefully and you can help the economy function more efficiently by removing distortions.
Maybe the problem is terminology. Equalizing CGT and Income Tax is seen as a tax rise, rather than taking away a capital gains tax relief.
We need our nations capital to be used to create wealth, not tied up in fixed assets. Our housing stock is over priced when compared to historic levels (relative to income). We dont want it to change too quickly, but we need to be better at allocating capital to wealth and job creation.
Treating capital gains differently to income distorts the economy and allows tax avoidance. Moving CGT levels towards Income tax levels over time and targetting relief on businesses that create wealth and employment should be good for the economy.
May 30, 2010
"If you invest money in housing you get two forms of payback, Rental income and capital gains."
+++
The rental income is akin to interest i.e. it pays the mortgage, or to out it another way it compensates for opportunity cost.
Capital gain generally arises through market fluctuations, and people have been known to incur capital losses.
It's all about risk and if the government want a share of gains they should also accept a share of the losses, and I don't mean offsets against future profits, I mean hard cash on the nose.
If they decide to go ahead with this tax rise, I suspect it will produce a short term gain followed by medium to long term reductions in revenue, which will help precisely nobody.
If they want to penalize short term speculators, then taper relief is the answer.
May 31, 2010
I dont buy the opportunity cost argument. I'm a businessman. I need to factor in the total profit, which is rent/interest plus capital gain/loss to decide whether to invest (in practice, I need to consider cash flow, which might make me weight one above the other depending on my needs, but thats a different story).
If my house is empty I dont get any rent, and the government does not compensate me. Why should it compensate me if I make a loss on my capital?
Income Tax, CGT (and VAT) are taxes on wealth generation, i.e. profits from economic activity. Government doesnt care about wealth destruction, just taking a cut when I create new wealth. That sucks for us, but thats how it stacks the dice so it always ends up our money.
I'm just trying to understand why there are different rates. Maybe in an ideal world we should reduce income tax and increase VAT and CGT to equalize them.
As I see it, the main difference between CGT and Income Tax are the allowances before taxation starts. The problem with CGT is the allowance is only for the year when the profit is realized.
Rather than tapering the tax rate, why not increase the allowance according to the length of investment? Maybe allowances could carry over from year to year if I dont use them.
An example, if I make a 100k profit over 10 years and the allowance is 10k/year then my total allowance is 100k, so my taxable profit is 0. If I make a 100k profit over 1 year then the allowance is 10k/year so my taxable profit is 90k.
We are not talking about raising CGT for the sake of it, but increasing CGT so that we can reduce income tax If CGT did cause a reduction in revenue over time then the corresponding income tax cut would increase it.
May 29, 2010
I think we're starting to see one of the well-publicised dangers of coalition govwernment: comprimise. The left wing of the Lib Dem party is full of disaffected socialists who saw the writing on the wall for their future in Labour in 1997, and made themselves a home across the political waters with the LDs. This is their punishment of the rich for being rich, and the law of unintended consequences is coming into play in spades to punish, instead, the prudent poor.
May 29, 2010
Dear Mr Redwood. I have worked hard all my life and paid my taxes, saved and invested my savings in stocks for the last thirty years. After Brown abolished b&b I have not sold 1 share, but have continually added to my portfolio. I am now 67 years old and now is the time to spend my hard won gains. If the CGT allowance is take from us and a punitive tax rate imposed it will be the final push I need to move overseas, I have had my belly full of lefty wingers ruining a once great Country.
May 29, 2010
I'd recommend that anyone who has a substantial inheritance should always consult a decent Independent Financial Advisor or accountant. Doing things one way as opposed to another can always result in a substantial tax saving sometimes at the cost of flexibility.
Re Private renting – I've often thought that a lot of people who get into private renting and have problems are relying far too much on Capital Gain rather than Income from the business. Maybe some banks are too keen to support this business model.
Re Supply of land for building – well if we continue to let Nimbys (aka SOME local people) to block developments we get the housing supply and prices we deserve.
The new government has got rid of top down housing targets but not freed the market. NIMBYS will doubtless rejoice.
May 29, 2010
The elephant in the room is the 'special liquidity scheme'.
In 2008 we were told that only AAA assets would be involved, and that these assets were actually 'worth' money, just that there was 'no market' for them at the time.
Clever guys on the internet were saying these AAA 'assets' were worthless. Now the CML are saying there will be a funding gap when the scheme closes if they don't extend it.
Why can't they just sell the assets? This is one of the ways they are propping up house prices at taxpayer expense. It is just a long term version of the dodgy Lehmans repos.
May 29, 2010
With a vacancy coming up as Chief Sec to Treasury, now is a good time to get your application in John.
May 29, 2010
As a complete aside but picking up on something JimF said…
If the government would like to raise the tax threshold to £1k above what I earn then I would be delighted to consider myself "disenfranchised"!
May 29, 2010
The whole point is that under HMRC rules residental property cannot be held as part of a pension scheme. The previous government gave it a whirl but bottled out of it. The coalition doesn't even seem to have given it a second thought.
Many of us wrinklies choose not to put everything we can into a SIPP (the Will Hutton solution) because of the restrictive and barely comprehenisble rules.
Some us therefore need to find alternative berths for already-taxed cash to be able to ensure a reasonable standard of living and not to become a burden on the state in our old age. I am not a wealthy man but I hope never to have to apply for benefits.
There is a huge demand for privately rented accommodation but there will be a dwindling supply if there is no incentive for investors.
May 29, 2010
John,
You are absolutely right about the risks that a hike in CGT without taper relief would pose to future entrepreneurship, and hence ultimately to the jobs market.
Take, for example, the recent case study of an entrepreneur who has set up a high tech manufacturing business – of the kind so in vogue with politicians of all persuasions – and who is minimising his salary to control overheads. He has created 50 new jobs in a short timescale but under the new proposals, if he sells even part of his shareholding in the company he would be taxed at 50%. He is therefore less likely to refinance the company in future by selling a partial shareholding to new investors, and also much less likely to take the risk of starting another business in future. Other entrepreneurs will also see that the risks of starting up capital-intensive manufacturing operations far outweigh the eventual potential rewards, and fewer such companies will in future be established.
Far from "getting Britain open for business again" or "encouraging entrepreneurs," the new administration is actually about to make a big step towards closing down these sorts of activities.
Jobs are not magically created by evolving economic conditions, they are created by people taking decisions and risks and making investments – something which some in the new Treasury team do not seem to have grasped yet.
May 29, 2010
JR has seriously misjudged the country's mood on the application of CGT to second homes or buy to let. The hundreds of thousands of people who own such properties are clearly very much against it but the tens of millions who don't are either completely sanguine about it, more likely and as in my case, strongly in favour.
This article is absolutely spot on in stating that the rampant house price inflation of 97-2007 was the result of a series of government cock-ups, and that low CGT was, whilst one of these, a modest contributor [pathetic financial regulation, senseless mortgage interest tax relief, out-of-control housing benefits, and inadequate homebuilding being muchg much more important]. But this is surely as clear an explanation as any as to why the tax is just. The astonishing gains enjoyed by the owners of such properties haven't been a reward for hard work, or innovation, or any such thing. They have been gifted by government cock-ups. And the gold rush that they partook in and benefitted from, whether they understood it at the time [or, indeed, admit it no] was not merely non-beneficial to the wider economy. Its impact was ruinous.
For tax on capital gains from property to remain so much lower than on earned income, or even for it to be indexed in a way that the returns on savings accounts are not, would be obscene.
May 29, 2010
I disagree John , although i am sympathetic to those trying to avoid Labours embrace of dependence for life and the dreadful manipulation of the money supply,economy and tax and benefits systems.
Housing is a special case and needs some social regulation as people need an affordable place with some stability to support a social and or family structure.
Most youngsters if they are renting &working and have saved for a deposit may have lost their deposit during the downturn as an average deposit today precludes you from all means tested benefits. Others may be carrying student debt as well. One of the reason benefits i feel benefits should move to an income not a unrealistically low asset basis. A much higher capital cutoff could apply. (Aspiration?)
Yes leverage was too available and mispriced but competition has forced prices higher because supply has not been able to keep place with demand.
Other factors such as planning controls and hidden tax on new builds. Hoarding of land banks (use it or lose it),and inward migration has had a part.
Housing is just too expensive, perhaps we should talk Flats as thats probably where young people can afford to start.
Those people who have invested in buy to let for pension purposes have chosen that route in full knowledge CGT etc can change. Some invested in money purchase scheme in a so called tax friendly schemes. These funds have been subject to all manner of pirate raids. Mr Brown et al and various management charges and probably through banksters overcharging for corporate service in takeovers of dubious value. Some have been fortunate in final salary schemes, not available to youngers.
Some have been in extremely generous HMG schemes and not been subject to tax raids or CGT or redundancy or unemployment.
I would suggest you allow individuals those a rollover into a money purchase scheme at the old 18% rate upto the normal annual limit. This would help the small 'one' buy to let individual, but catch those who have multiple or even hundreds. Will you refund Browns tax raids on money purchase schems and apply a similar exit tax on all non funded HMG schemes!?
I still think income tax and CGT should be equal. Both taxes should be lower! But we are where we are and all need to pay this debt off not just those who have not till now.
Interest relief on buy to let should be restricted for investment properties. This could then be used to finance the aspirations of first time buyers.
If we had proper controls on Parliament via a constitution which prevented money printing, voting absurdities along with West Lothian question etc and unbalanced budgets maybe the great asset bubble wouldnt have suited a so minded politican.
We should return the risk and control and responsilbilty for mistakes to the those that make them including Parliament as individuals, to the limit of their accrued pension pots.
May 29, 2010
Many rented private sector properties (particularly in London and other large cities) are indeed let out, not to "market" renters, but to persons receiving housing benefit. In effect, as you say, a form of "social housing"
This has been so under recent Governments of all political complexions.
So surely in these circumstances the commercial risk is much diminished, as the tenancy is sustained by a guaranteed public subsidy stream, –and therefore a sensible CGT regime should be applied. in these specific circumstances ?
May 29, 2010
There's going to be the same number of houses available whatever the CGT rate is. I'm afraid I don't have the figures to hand, but I believe there are substantially more empty homes in this country than there are homeless people.
If house prices come down, then they will be more attractive for Buy to Let investment purely looking at rental yields rather than potential future capital gains. Also, people like me will be able to afford to buy a property meaning less demand for rented property.
May 29, 2010
Sorry, but if there is one set of people that have had a bailout it is Buy to Let investors. Stock investors, have the option of ISA/SIPP, and I do think CGT should have taper relief there.
But BTL investors have been handed money from the bank accounts of savers through QE and tax breaks through Special Liquidity schemes.
There is no way they should get any more tax relief, if we need to pay more taxes to put right the mistakes, they can pay their fare share.
I sold my house in Dec 2006, and put the money into Commodities and other currencies (thank god) – the economy of the UK should not be ruined to suit BTL investors. It won't work.
May 29, 2010
" Why must we penalise the saver and the prudent? "
Amen John. So, we can stop QE and stop liquidity schemes – both of which have taken money from savers and prudent and handed them to BTL investors.
As my wife is a foreign citizen you get bet my SGD, NZD and AUD that I won't be switching back to GBP any time soon, whilst the economy is -still- being ruined.
May 29, 2010
High house prices were not just caused by over generous lending but also the continuing problem of more people coming into the country than we are building homes for. Rented homes often look down at heel, have neglected gardens, over stringent rules and high rents – caused as above – too many people, too few homes. The remedy of building large numbers of homes is not a popular one. We are in a pickle difficult to solve; fiddling with CGT won't make much difference either way.
May 29, 2010
Off subject, but at the rate of one every two weeks the LibDems will be totally out of MPs for cabinet positions in about 2 years. Will you guys get a go then?
May 29, 2010
John, having looked at the comment section in the Daily Mail, The Times and the Telegraph on CGT this week the overwhelming opinion is that the proposal to raise CGT tax is fair – and due to the buy to let sector playing part in the credit crunch there is a moral case for re-applying the tax.
I am sure Conservative HQ has looked at these comments in the national papers are realised they will gain far more votes by increasing CGT to income tax levels on houses and lose a lot of votes dropping CGT on second homes as you suggest.
May 30, 2010
For those that say landlords own property that needs to be sold to owner occupiers. There is an answer to this. Most of my tenants are in their 20's & are only in the city, Southampton in my case, for a year or two as they progress through their careers or education. They therefore do not wish to buy. It's therefore vital that rental property continues to remain available to such people.
People seem to think landlord's are raking in easy money. If it's that easy why isn't everyone doing it. There are hassles, worries & risks just as with any other business. For the 1st 10 or 20 years most of the rent goes to pay the mortgage/s & maintenance costs so during this period the landlord will see little income in return for all this worry & risk.
People need to stop bashing landlords who provide vital accommodation just as much as hoteliers do.
As it is landlords don't have the tax free sum when they sell their properties to retire, which is something that hoteliers do have when they sell along with everyone else who has a tax free lump sum when they draw their pensions. Higher CGT will have to be accompanied by the re-introduction of taper relief or indexation.
If property prices are high it's due to over population & lack of house building, not due to landlords. Too many people & too few homes in this most densely populated country in Europe is bound to result in homes that are difficult to afford for the average person.
Any re-intoduction of Miras or any other assistance to raise the purchasing power of buyers will simply send prices higher by the law of supply & demand.
May 30, 2010
When o when are we as a nation going to come to our senses and realise that the only way we will create a viable and successful nation is for people to take responsibility for themselves and not rely on the state for comfort and guidance.
Part of this is giving all the ability to create their own pot of wealth. Punishing those that have been prudent and put money away whether it be in property, investments or simple savings is no way to create a society that is self sustaining. The LD proposed increases to CGT send out totally the wrong message to those that need all the encouragement they can be given. The nation needs people to save and invest in the UK why does the Government seek to tell them that they should go elsewhere?
May 30, 2010
We have always saved for a house but have watched house price inflation get out of hand benefitting the likes of the Wilsons who planned to own 1000 houses and be the first BTL billionaires. We are presently renting a house since Jan 2010 which was bought for £190,000 by a builder and poorly refurbished to get a quick profit. However, due to the recent property downturn the builder rented it to us. He now wants to sell the house for £285,000 and has served us with 2 months notice – believing that he is being kind to us because by his laws he only needs to give us 28 days notice. His notice was a simple letter so legally it is not enforcable. Mr Redwood, you only seem to see your very narrow interests. Your assertion that the smaller saver is punished has nothing to do with CGT but to do with the ludicrous slide in share prices held in tax efficient ISAs and savings accounts that get no return at all because the BTL market is being propped up with ridiculously low interest rates. You are very wrong to support gambling ones pension on the propery market because all you are doing is preventing families like ours – 5 yr old 7 yr old 40 yr old 43 yr old – just to sustain a pyramid that keeps you and your wealthy constituents fedding off the lower bricks in the pyramid. House prices have exploded and need to come down – any fair minded person knows that.
May 30, 2010
They would only pay CGT on the gain in value of the property relative to inflation from when they inherited it. If property prices hadn't gone up wildly ahead of inflation but just stayed at the same rate as inflation they would be paying no CGT at all. So why shouldn't they pay it?
May 30, 2010
CGT won't destroy the BTL market.
Who is a landlord selling his house to? Another BTL landlord? People who want to buy?
BTL should not be seen as the sole solution for the rented sector. BTL has driven up rents and LHA now provides healthy incomes for BTL.
Entrepreneurship is not what I'd consider BTL to be. When LHA is so high there is no risk and indeed many properties have been bought via taxpayer's paying for the rather insane levels of LHA across the UK.
BTL's easy credit has meant that property is so expensive normal people can not afford to buy.
I do not see how that benefits the UK at all. High rents mean a poor economy. Who can afford to work when their rent is so insanely above anything they could afford on normal wages.
Tax the capital gains on property!
If you give in over this basic thing then how will the coalition manage to get through anything useful regards budget and cuts?
Someone's got to pay for the mess of easy credit and high house prices – so why shouldn't it be those who've profited from it.
May 30, 2010
Dear John,
Land is monopoly right granted by the government. Granting this monopoly denies entrepreneurs and individuals alike access to land.
In a free and fair market, competing claims on natural resources are allocated efficiently. A rational negotiation ends when the 'winner' agrees to pay compensation to the 'loser', in exactly the amount the 'loser' could have made by using the land themselves. The 'winner' is only willing to pay this, because they can make more efficient use of the land, and so will still make a profit.
In a free market, it is the landowner that pays a fee for recognition of their claim to the land. The idea that the landowner should instead be able to collect a fee is perverse. It is government intervention that produces this distortion and because property profits arise entirely from government intervention, they are no different to other benefits such as the dole.
This middle-class benefit also results in a less efficient use of the land. An end to BTL would not result in an increased need for government housing, in fact the opposite. Capital gains tax on housing profits will results in a reduced need for government housing.
Since governments won't ever stop meddling, a capital gains tax on property is the next best thing to a true free market. It mimics the free market outcome, but with the advantage of reduced transaction costs (one of the few advantages of having a government at all).
None of this is remotely controversial. We stand to end the middle-class benefit hand out, make more efficient use of the land and help to pay off the deficit by taxing the people who caused it. The opposition to what is a very modest step in the right direction, comes entirely from benefit recipients who prefer a free handout to getting a job or starting a business.
The free market solution is absolutely clear and, as always, much better than the alternative. Your readiness to abandon it simply because it hurts you own favored interest group is worrying.
May 30, 2010
If the lady that came to see you had sold the house immediately after probate without achieving a gain, I don't think that you would have been up in arms about paying tax on investment income on the sales proceeds (other than a righteous – and justified – general indignation about the big tax, big government society inherited from Brown). People who have achieved a capital gain have MADE MONEY and so can afford to pay some of it in tax. Just like the rest of us who make money with a job or with savings interest. I thought it was supposed to hard for everyone, we were all going to be in it together? Clearly that was meant to exclude a vested-interest that has caught the ear of the Tory right. I guess the rest of us will just have to stump up even more. Very reasonable.
I have no idea whether or not BTL has contributed to the housing bubble. However on the basis that it clearly can't have helped it does seem probable that it has exacerbated it to some degree, although as you say the primary cause was the ludicrously cheap credit conditions (which, incidentally, show no signs of being tackled in this country). I certainly don't understand why you seem to think BTL has contributed to the overall availability of residential accommodation. The houses were there anyway, merely denied to others by the competition from BTLers.
I'm afraid that you are being uncharacteristically muddled-thinking over all of this.
May 31, 2010
it may have already been mentioned, I don't know, but housing benefits to cover a family's rent when out of work seem to cover really quite high rental costs, above what the local salaries might be expected to afford – in my opinion these are a major driver for high house prices, as they push up an areas's rental costs, thereby increasing marginal investment yields and adding upward pressure on house prices as investable assets.
The related problem is that in forcing up local rental prices they therefore make it more expensive for people WITH jobs to rent a place to live in. It comes as little surprise that those who work for a living in the generations that were too young to have ever seen affordable houses to buy, have a poorer quality of life than those on the dole.
May 31, 2010
Take three people.
Person A borrows money to buy houses to rent out. He keeps them for ten years. The rental income covers the cost of the mortgage interest and gives him a modest stipend to live on, so he doesn’t need a job. At the end of the period he sells the houses and makes enough to pay off the loan and has a capital gain of 1 million.
Person B works as a head teacher and earns 100,000 per year. Over ten years he earns 1 million. He lives modestly, so saves most of his money in the bank.
Person C borrows money and starts a business. He works hard for ten years, taking a modest salary so that he can grow the business. After ten years he employs 50 people. He sells the business and pays off the loan, and has a capital gain of 1 million.
Who should pay most tax?
June 3, 2010
Still doesn't make any sense John.
It doesn't change the fact that income from profits on a second home should not be taxed at a lower rate than a basic rate taxpayer pays on their savings. If you have got a CGT tax bill you are in a fortunate position to start with , especially given that the first 10k of any capital gain is tax free.
If we are going to have special rules for BTL'ers what about having a tax cut on peoples cash savings as well?
BTL would be fine if we had a pentiful supply of homes, unfortunately we don't, we have the backwards scenario where a relatively small number of people are buying up mutiple houses. The chronic housing shortage just makes this practise even more attractive to investors. This is storing up long term trouble , especially to the pensions of the many who will be forced to pay top whack rent when they retire, having never been able to buy.
June 5, 2010
"Deterring private rented accomodation will be insufficient to slash house prices, but will put rents up."
Whilst I agree that loose monetary conditions were a root cause, I don't understand how you can make this last statement. The houses aren't going anywhere. If private rented accommodation is deterred there will be more houses available for purchase, hence a reduction in prices. Part of the problem has been people buying houses to live in having to compete with investors/speculators (select according to taste) who then rent the houses back to those who might otherwise have been able to buy.
I hate to say this but I am beginning to think that you have a vested interest. From always coming across as well reasoned and rational (almost clinically so) your logic on this whole CGT matter has been looking distinctly shaky.
PS Has there been a problem with your server? For a while it was impossible to read many comment listings without getting "404" errors.
Reply: I believe there was an error with the system which has now been rectified, I am told.
No, I do not own BLT property so I am not arguing my own case. I make declarations of my interests so people can see them, and they do not include any BLT.