Restraint required when raising CGT

7 June 2010

What will the first phase of coalition government bring? Rumours are rife that Capital Gains Tax rises will hit the housing market due to the impact on buy-to-let properties.

But there has been little comment from the government about the proposed CGT hike so this space has been filled with guesses and fears which will hopefully prove to be unfounded.

There is a risk that a poorly thought through tax rise could damage the housing market at a pivotal moment in its recovery. If a moratorium allowing individuals to sell property by a certain date and thus avoid the rise is announced it could be disastrous for prices.

There are three million houses in the private rental sector, the majority of which are owned by individuals who could be caught. Imagine what would happen if a big chunk of these properties were sold at the same time.

Equally, to raise the tax immediately could have a negative effect on future buy-to-let purchases and encourage landlords to decide to never sell their properties, meaning little or no incremental tax revenue for the government.

The best option is to maintain the existing CGT allowance and raise the tax to the individual’s marginal rate or 25%, whichever is the lower.

Putting it up to 40% would be a penalty on investment acumen while 50% would be daylight robbery. Keeping rises reasonable would raise most money. In this case, less really could be more.