Capital Gains Tax restricting supply in the property market?

[flashbac]

Hear me out here.

It's correct there is a tax to pay if you have a property that makes you a profit when you sell.

But I wonder if this is having unintended consequences for the property market?

Gapital gains tax on property is quite high as opposed to other assets, at 18% or 28% depending on if you are a higher rate taxpayer or not (if you make a big gain, say 60k, you'll be partly pushed into the higher rate bracket in any case).

This is not me getting the violins out for people who have made big gains from property.

My argument is that capital gains tax means people think twice about selling and will hold on to the property and perhaps remortgage instead. This means supply is kept low, further compounding the issues with our broken property market. Prices are high because there aren't enough houses on the market. There aren't enough houses on the market because people are not selling them.

Here is an example of what I am talking about (please excuse the bold fail and this is not me, I don't have another property):

• "Can I please ask for advice on my best way forward. I have a property value approx £700K no mortgage and currently let for £1300 per month.

I now have planning in place for this to become fully residential ie shop into a lounge. Once the works are completed value £730k.

If i sell there will be CGT of £60k plus associated costs.

I do not have other income and have reached the age of 63, is it possible to find a lender to offer a BTL mortgage and re invest elsewhere..." *

www.propertytribes.com/should-i-sell-or-mortgage-t-127654433.html

One idea is that CGT should be reduced if the property is sold to a first time buyer who will be living in it.

Just to clarify:

If a property is your main residence there is no CGT.

So you are taking about selling property people bought or kept specifically as a investment to let and/or sell?

But CGT is paid on profit, so it's not like you have to find the money iyswim: it comes out of the proceeds. I don't see why that would restrict supply. Isn't what you're saying the same as "I don't want to work because then I'd have to pay income tax".

I dont understand the part about a £60k profit pushing someone into the higher tax band

I dont understand the part about a £60k profit pushing someone into the higher tax band

They will have to pay higher rate tax as a result of the profit. Selling a house is all-or-nothing, unlike a similar investment in shares where you could sell off a fraction each year and avoid higher rate tax, or even basic rate tax if you stay within the CGT allowance. (I suppose in theory you could sell shares in your house, but in reality it's impractical.)

It's correct there is a tax to pay if you have a property that makes you a profit when you sell

Not if it's your home it isn't.

@RandomLondoner

I dont understand the part about a £60k profit pushing someone into the higher tax band

They will have to pay higher rate tax as a result of the profit. Selling a house is all-or-nothing, unlike a similar investment in shares where you could sell off a fraction each year and avoid higher rate tax, or even basic rate tax if you stay within the CGT allowance. (I suppose in theory you could sell shares in your house, but in reality it's impractical.)

So you're saying the profit counts as income?

I can’t get upset about CGT. It doesn’t affect most ‘normal’ people on average incomes.

I’d raise both CGT and IHT if I was in charge of the world 🤷‍♀️

@FunnyInjury

I can’t get upset about CGT. It doesn’t affect most ‘normal’ people on average incomes.

I’d raise both CGT and IHT if I was in charge of the world 🤷‍♀️

OP is not asking if it's wrong, they're asking if it's counterproductive

The logic that people are holding off selling investment property because of CGT is somewhat flawed. They are taxed on gains, any business person would factor this into any mental calculations they are doing. Similar to if I am offered a new job I would factor in what I will pay in income tax. Your logic is a bit like saying people turn down pay rises or higher paid jobs because it will result in higher taxes to pay. Yes it will, but you still end up with more income.

No one pays CGT on their sole, residential property. You can make as much as you like on that tax free. It is only payable on profit. There is an annual CGT allowance you can use to offset some of the tax due. In your example the investor would be getting in nearly three quarters of a million £ free of debt. I would, frankly, struggle to say they should not pay tax on some of it and I see no evidence whatsoever that it restricts housing stock. So no, I would not cancel CGT

This is true of everything. If you tax something in short supply, you suppress the supply even more. Taxation is a lazy way to solve problems usually supported by people who don’t have the manual capacity to come up with creative solutions. Yes, that means civil servants and politicians.

You won't have to pay CGT if you're not making a gain, and the CGT payable will never exceed the gain.

Do you have any evidence that CGT is impacting supply?

The CGT payable can exceed the gain if you’ve had further borrowing on the property. So that might put people off selling.

You only pay capital gains tax on the amount that the value has gone up since you got it, there is also an tax free allowance of about 12,000 per person.
In the OPs example the owner would probably be able to offset some of the costs of improvements against tax as well. Not sure if it prevents owners from selling second properties or not

@Aprilx

The logic that people are holding off selling investment property because of CGT is somewhat flawed. They are taxed on gains, any business person would factor this into any mental calculations they are doing. Similar to if I am offered a new job I would factor in what I will pay in income tax. Your logic is a bit like saying people turn down pay rises or higher paid jobs because it will result in higher taxes to pay. Yes it will, but you still end up with more income.

You can't really compare it to income tax in relation to pay rises. With a pay rise, you and the taxman both gain and there is no mechanism to release the funds another way in order to avoid the tax. With capital gains tax you can decide to remortgage and release your gain, e.g. to buy another property, thus compounding the supply problem, in order to avoid CGT.

Why would you pay 60 grand to the taxman when you can remortgage instead and have the rent covering the mortgage?

Our system is still geared to encourage property hoarding.