Reports suggest Labour may introduce capital gains tax (CGT) on home sales in the Autumn Budget. It sounds like an easy revenue-raiser.
The evidence says the opposite: it would slash transactions, gum up housing chains, and could even collect less tax overall.
With stamp duty already doing huge damage, the last thing we should do is add yet another tax on moving house. There are better alternatives.
Stamp duty land tax – paid when you buy a property – is a deeply hated tax. Tax something and you get less of it.
Stamp duty taxes transactions, so it’s no surprise the result is fewer house purchases.
More surprising is how big the effect is: figures from the Office for Budget Responsibility (OBR) suggest that stamp duty is deterring about 70,000 house purchases every year.
Each of these deterred transactions has a cost, in reduced labour mobility, slow and inefficient use of land, reduced economic growth.
We also shouldn’t forget the human cost: being unable to move house makes people miserable.
CGT on main homes — making things worse
Reports say ministers are considering CGT at 24 per cent – for higher-rate taxpayers – or 18 per cent (basic rate) on sales of people’s homes.
Currently, CGT is only charged on second homes, rather than the main residence someone lives in.
It’s tempting: main residence relief is the UK’s largest tax relief, “costing” £31bn. But there’s a big problem.
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Take an example: someone bought an average detached house in 2010 for £250,000; it’s now worth £440,000.
Moving to another £440,000 house already triggers £12,000 of stamp duty. Add CGT: that £190,000 gain implies £45,000 of tax. For most households that’s unaffordable.
The result would be a collapse in house sales – the OBR SDLT data implies transaction volumes would fall by well over 45,000.
That’s why no developed country fully taxes gains on a main residence. Many simply exempt them (eg France, Germany, Australia, Denmark, Ireland.
Others allow deferral when you buy a new residence (eg Switzerland, Sweden); and the US exempts the first $250,000 of gain ($500,000 for married couples).
It’s been suggested CGT could apply only to homes over a threshold, say £1.5m.
That would be unfair, distortive and – crucially – raise far less than headline figures suggest. It could even lose money.
The problem is that if we add a massive cost to selling a house then, as we already see with SDLT, the number of transactions will drop.
That drop reduces the CGT revenue Government’s hoping to collect, because fewer people are selling.
And it also reduces the stamp duty revenue that Government was previously collecting.
These two effects combine, and mean that CGT on high value house sales could actually lose tax revenue. (We’ve calculations demonstrating this on the Tax Policy Associates website.)
And there would be wider ramifications.
A drop in high-value transactions will reduce lower-value transactions, as “chains” propagate the shock to lower price points.
So what’s the answer?
We should replace stamp duty and council tax with a modern land value tax (LVT) – an annual levy on the undeveloped value of land. Because it isn’t a transactions tax, it doesn’t deter moving.
It discourages land hoarding and accelerates build‑and‑sell. Economists across the spectrum support variants of this approach, from the Institute for Fiscal Studies to the Adam Smith Institute to the Resolution Foundation.
It wouldn’t be easy, politically or practically. But the fundamental point is clear: we should stop taxing the act of moving house, because we want people to be able to move house.
We should tax land – because it’s the one thing we won’t get less of when we tax it.
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