Leading housing expert and British economist, Kate Barker claims charging capital gains tax (CGT) on the nation’s main residencies would be an effective strategy to tackle the housing shortage and give equal access to property ownership.
The former member of the Bank of England monetary policy committee says this controversial taxing system would not only curb property inflation, but would discourage over-investment in housing.
In her new book, Housing: Where’s the Plan?, Barker states,"Charging CGT on gains on our main residences would bring the taxation of housing more into line with other assets, and it would tend to discourage over-investment in housing".
Capital gains tax is currently only imposed on second homes. However Barker insists there is a strong case to have the same system applied to primary residencies.
"Changes in house prices often result from public policy: restrictions on neighbouring land, transport links, or the quality of a nearby school, for example. It is odd not to tax these gains, which the homeowner has done nothing to earn, but charge CGT on the profits from selling a business enterprise. But it would undoubtedly face very strong public, and therefore, political, opposition."
The best approach according to Barker, is having a capital gains tax bill accumulated by an individual or couple, which is then charged on the death of the partner, similarly to inheritance tax (IHT). The figure would be subtracted from the estate for IHT purposes.
"This reform could lower the rate of housing inflation (as the effective tax rate on owner occupation is increased) and reduce the incentive to hold housing assets for investment motives. It would improve equality by increasing the ability of those not lucky enough to inherit a share of a property to compete in the housing market."
From the date of enforcement of this proposed tax system, it would only be applied to increases in property values. Though this would minimise disruption, it would also slow the accumulation of revenues. This means if the government were to introduce this, they would need to take the brunt. All the while though, the benefits would gradually emerge over time, says Barker. This would not only include a surge in tax revenues, but more equal access to home ownership.
"Even an optimist about tax reform might feel daunted by this, and yet it may well be the best reform tackle the adverse social consequences of under-supply of housing."