The Chancellor needs to plug a huge hole in the UK’s finances and has pledged to promote growth.
Housing is a central component of this so, when mulling over increasing capital gains tax (CGT), Rachel Reeves must remember how previous policies have led to changes in private rented sector investment.
Reeves has gone on record saying she will need to make tough decisions in her first Budget as Chancellor.
One option at Reeves’ disposal is aligning CGT to income tax. Considered a much more palatable tough decision compared to raising income tax and National Insurance, the hike was seen as a done deal.
But, following an apparent leak, it has been reported that the move is off the table.
Although tax rises are seen as inevitable, Labour has been tight-lipped on the recent speculation, so it remains just that until the Chancellor ceremoniously holds the red Budget box aloft at the end of the month.
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A CGT hike may have limited benefits
With Reeves now planning to raise a revised £40bn to plug the gap in public finances, the need to use CGT as a tool to hit this target is clear. But would it be effective?
HMRC modelling of the fiscal impact of different tax changes found that a one-percentage point increase in the higher rates of CGT, effective from April 2025, would generate an estimated £100m in 2027–28.
A 10-percentage point increase would see revenue fall by about £2bn the same year.
Those figures look underwhelming at best and Reeves must also consider the unintended consequences of such a move.
Learnings from the past
An example can be seen in two policy changes introduced midway through the last decade.
The first saw mortgage interest relief restricted to the basic rate of income tax and the second was the introduction of a 3% surcharge on stamp duty.
Industry data on buy-to-let property purchases highlights how the changes have led to a disproportionate effect on regional investment, with the North West, North East and Yorkshire and Humber overtaking the south as the region seeing the greatest proportion of buy-to-let purchases over the last decade.
This is because the affordability of property in the north means that the policy has not increased northern landlords’ tax burden to the same degree as their southern peers.
The same can be expected with CGT. Analysis by wealth management company Quilter forecasts that the move would increase landlords’ tax bills by £11,000.
This is the average for the whole of the UK and, unsurprisingly, the burden would be felt most by landlords with property in London and the South East, with estimates that CGT could hit £21,440 and £16,000 respectively.
The analysis of Zoopla data found that the average second homeowner in the North East, Yorkshire and Humber and the North West would pay below average CGT and a fraction of what their southern peers pay – £4,320, £7,840 and £8,560.
With Labour promising to increase investment to stimulate economic growth, this is something they need to be mindful of. Small and medium landlords in England and Wales are estimated to contribute £45bn to the UK economy.
In addition, the private rental sector is a facilitator of economic fluidity, providing flexible housing for tenant cohorts that are crucial for our prosperity today and tomorrow, such as temporary and migrant workforces and students.
While it remains to be seen if CGT is reformed, it’s an issue that brokers should keep a keen eye on as their landlord customers navigate the changing regulatory and fiscal environments.
