A ‘primary property gains tax‘ has been mooted as a replacement for stamp duty in an effort to close the gap in wealth inequality and help address the housing crisis.
The idea becomes ever more potent as more parents release equity to help their children into home ownership.
We asked this week’s Marketwatch panel if such a tax could be a good idea.
The Bank of Mum and Dad is arguably one of the busiest in the UK as people seek to use their housing equity and savings to boost younger family members onto the property ladder.
Whilst intergenerational gifting using housing equity is at record levels, retirees are also utilising that equity to fund their retirement.
Taxation on housing equity is likely to hamper rather than help the situation.
We need to consider carefully what we really want individuals to do with the equity in their homes by encouraging positive behaviours, not discouraging them from unlocking either through a house sale or release of equity.
Will we see debt-free over-65s remaining in family homes as they don’t want to leave the area they love and certainly don’t want to get into debt to meet the cost of tax and downsizing?
Estate agents suggest that the average over-65 downsizer releases £46,000 which is relatively little when you consider what it might need to cover and still make financial sense.
We need to take a more holistic look at how we can unblock the housing market rather than just moving from one tax to another.
If we genuinely want people to move, we need to provide more homes which are suitable for older people and make the process simpler rather than more complex.
Abolishing or discounting stamp duty for ‘last-time buyers’ who are looking to downsize or resize would seem more sensible.
The housing debate is something that has raged long and hard ever since I can remember but has especially come to the fore in the last few years as it has become evident that the housing problem is becoming a crisis.
Politicians on all sides of the House have mostly talked a good game, but failed to deliver a consistent, well-rounded and long-term policy that can not only deliver the numbers of properties needed, but to deliver those in a truly affordable way.
Encouraging people onto the ladder is one thing, but the housing market needs to be fluid, with a larger number of transactions to allow for employee and social mobility.
Cost has always been one of the biggest barriers and Stamp Duty has always garnered criticism for adding a further hurdle exactly when many people can least afford it.
Although the latest Stamp Duty changes have gone some way to help, particularly first-time buyers, there is still a great deal of support for changing the system entirely with the burden being put onto the seller rather than the buyer.
The logic for this seems pretty sound; after all the owner has benefited from the use of the property, the growth in equity and they are receiving the money on the sale so they should carry the tax burden.
However, in cases where no growth in equity has been made this could seem unfair, so would Capital Gains Tax actually be a fairer way of doing this?
It would certainly help in redistributing wealth, where the luckier ones pay more tax on a property they have benefited greatly on.
The problem with this is overtly political.
Could a Conservative Government really be the ones to bring in a policy where your own home is subject to Capital Gains Tax? It may well be the last thing they did for many years.
The government has an unenviable task to fund care in later life, collect revenue, and try to sort out the ‘housing crisis’.
The idea of scrapping stamp duty, considered as a barrier to entry, is one idea to be replaced with a tax on the profit of main residences upon sale is one idea.
The removal of stamp duty would be a popular decision as a £600k property currently has £20k stamp duty levied – not an inconsiderable sum.
This would result in more property being sold and provide a fillip to the current weak market and it works in the favour of those trading up in value.
But the people downsizing would feel they are being penalised and left financially worse off at the time in their lives when earning capacity is relatively low – retirement.
These people are likely to consider staying put and looking to release their equity in a different way via lifetime mortgages or the new retirement interest only mortgages.
They would not sell. That means the amount of larger properties available to buy will reduce as people stop downsizing.
This could increase the prices of such properties due to a new scarcity.
It will also potentially yield less tax revenue as people choose not to sell in these instances, and if they are not selling then there is no purchase, which had there been stamp duty would have yielded revenue.
So would this idea to scrap stamp duty and replace with a property profit tax help the economy?
No, much of this economy relies on housing transactions where people move, spend money on goods and services and pay stamp duty.
Reduce the number of transactions and you reduce revenue for the Treasury and people do not need to pay builders / plumbers /decorators /architects /retailers for all the things they need in a new home.