What a Capital Gains Tax review could mean for homeowners

Everything you need to know about the Chancellor's capital gains tax review and what could change...

This week the government announced it was undertaking a review of the capital gains tax system to ensure it is “fit for purpose”.

The Chancellor has asked the Office of Tax Simplification for proposals “on the regime of allowances, exemptions, reliefs and the treatment of losses within CGT, and the interactions of how gains are taxed compared to other types of income.”

While the Treasury say this is standard practice, commentators have warned it could lead the way to “a tax grab” in the autumn.

“It would be naive to assume the chancellor didn’t have his eye on tweaking taxes to refill his coffers,” Nathan Long, analyst at Hargreaves Lansdown, told the BBC this week.

What is Capital Gains Tax?

Capital gains tax (CGT) is payable when you sell an asset that has increased in value since you bought it. It is a tax on the profit you make.

In large, it applies to gains made on property and shares. The Office for Budget Responsibility forecast that in 2019/20 CGT would raise around £9.1bn, which is about 1.1% of all tax paid in the UK.

The rate varies based on a number of factors, such as your income and size of gain. For residential property, it may be 18% (if you are a basic rate tax payer) or 28% (if you are a higher rate taxpayer) of the gain (not the total sale price). It’s only the gain that is taxed.

How could changes affect homeowners?

Currently, our main home (or primary residence) is exempt from CGT on the gains made when we sell. As a result, most of us will never have to pay CGT. According to the Resolution Foundation, only 0.5% of UK adults currently do.

But with this review, the government could look at removing the CGT exemption when homeowners sell their main home.

However, commentators suggest the hostility this would receive makes it unthinkable under a Conservative government.

It would also run counter to recent government changes aimed at getting the property market moving again, such as the stamp duty holiday.

But second homes and buy-to-lets may be a target for greater taxation and more acceptable politically. The CGT rate could be aligned with income tax rates – at 20%, 40% and 45% – meaning that the tax take on buy-to-let disposals would rise sharply. The knock on effect of this though, is that landlords and holiday home owners may sit tight rather than selling up, and the move may act to further stagnate housing transactions.

The government could also abolish or change the current £12,3000 annual CGT-free allowance.

Basically, everything is on the table, so watch this space! With a government manifesto commitment to not raise income tax, National Insurance or VAT, the Chancellor has very few options for raising the income needed to pay for coronavirus recovery measures.