Rishi Sunak will today set out a £4.3bn plan to combat mass unemployment, as the chancellor reveals how the government will invest in the economic recovery following the coronavirus crisis.
Having already announced a £16.5bn boost to defence spending last week, the government is set to outline its other spending plans for the next financial year, which is expected to include more money for NHS as well as infrastructure.
But while Sunak is expected to announce that now is not the right time to start a fiscal consolidation, tax increases are on the horizon.
Officials have suggested that forecasts will show a hole of about £40bn in the finances that will need to be filled by higher taxes or an unexpectedly strong recovery from the economic downturn.
Given that the PM Boris Johnson has ruled out a return to “austerity” in public spending, this money will have to come from somewhere.
There has been speculation for some time that capital gains tax rates would increase.
CGT is currently charged at 20%, but there are growing calls that it should be increased to 28% across the board or possibly aligned to income tax rates – at up to 45%.
The government’s tax adviser has recommended that CGT be overhauled with proposals that could see the number of people hit by the duty increase sharply.
Rishi Sunak, who commissioned the review, is considering proposals by the Office of Tax Simplification (OTS), a Treasury-based body, to reform capital gains tax in the light of the economic and fiscal impact of the Covid-19 crisis.
The move has the potential to bring in an extra £14bn by reducing exemptions and doubling rates, according to the review.
But a potential CGT hike could adversely affect the PRS and the wider housing market, according to Apropos by DJ Alexander.
The letting firm, is among those that fears that the widely trailed increases to CGT will have an unprecedented negative impact on the market.
David Alexander, joint chief executive officer of apropos by DJ Alexander, commented: “While the spending review is not the time when the Chancellor will announce any tax hikes it is clear from the Treasury’s messaging over the last week that increases are coming next year. CGT seems set to be top of the list for substantial increases and there is little doubt that landlords, second homeowners and property investors are firmly in Rishi Sunak’s sights.
“He sees this as an easy target politically and financially. Unlike many other assets property can’t hide and as CGT affects a relatively small part of the population it looks like an easy fix for the enormous debt accrued during the pandemic.”
Alexander continued: “But if Sunak widens the take and breadth of CGT the number of people liable will rise and landlords with one or a small number of properties will be drawn into the tax. The targeting of the tax may have unintended consequences. Equally he will understand that simply increasing a tax by a certain percentage rarely results in a directly comparable increase in revenues. The larger institutional investors will always have the option of shifting their investments elsewhere either geographically or into a different asset class resulting in a lower tax take.
“As with all serious policy changes it is predicting the unknown outcomes of the actions which will catch the politician unaware. The first clear risk is that this will have a major impact on the private rented sector potentially leading to a housing shortage in the rental market. Any large-scale exodus from the market by landlords and investors could also trigger a sudden fall in house prices if a large number of properties are suddenly dropped on the market ahead of a CGT hike deadline. Given the market is likely to dip in April once the temporary reduced stamp duty threshold is ended this could be a move which results in negative equity and financial losses for a great number of people.”
He added: “Any substantial increase in the rate of CGT will impact on individual landlords, second homeowners, and the small-scale investor the most. The larger landlords and investors will be able to utilise the skills of accountants to offset their exposure but for the smaller landlord the impact could be substantial. A property used to shore up retirement funds, or care home fees, could suddenly be hit by a tax which is imposed with little warning, on a sector that is exposed, at a time when the market is potentially fragile.
“The risk is the chancellor ends up killing the PRS, fails to substantially increase the tax take, damages the property market, and ends up hurting landlords and tenants alike.”
Including the portals, Facebook and Gumtree in schedule 23 of the finance act as data holders would mean having the ability of generate a CSV file of all agents and individuals who are advertising properties to let. An property that’s advertised generally means there is a taxable liability.
With a CSV file of advertisers it’s not difficult to request the existing schedule 23 report form all agents and individuals.
With a near complete list of properties let during the year SA105 Land and Property returns can be requested of all landlords receiving rental income.
At present and its been that way for 20 years or more, Landlords who are not asked to complete SA105 don’t have to volunteer to complete one, the upshot is HMRC do not know how much tax they are not collecting.
In 2012 when I sat down with two senior officials from HMRC to calculate the unpaid tax, they estimated ( guessed based on a minimum 10%) £2 billion of tax is not requested and therefore not collected each year.
That isn’t against the law but it is a bit off that HMRC is not asking for tax that is due. When I asked why a coded solution could not implemented….. ” It is too simple and too automated, it will cost jobs so we won’t get that past the civil service unions’
The back tax for the past 20 years is still owed, landlords only have to be asked for it. Before Mr Sunak tries to invent new ways to tax people how about he concentrates on collecting all the tax due on the PRS since 1999?
“At least £40 billion tax hasn’t been collected because SA105 is, in a lot of cases, an opt in tax and alot of landlords have not opted in to compleing the submission”
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You may be correct about normal LL however there are many live-in LL that take in lodgers that are NOT required to report ANYTHING to HMRC.
The Room for Rent Allowance allows live-in LL to receive up to £7500 in lodger rental income.
There is NO requirement to report this income.
A live-in LL may change every tax year to paying tax if it works out more profitable that tax year not to use the RFRA.
This situation normally occurs when the cost of works may be offset against against tax.
For most live-in LL the RFRA is the most effective solution for lodger income.
Lodgers are a significant part of the PRS and they are not required to be reported to HMRC.
However there is a major problem with the RFRA.
That is if a live-in LL has more than 1 lodger but still receives no more than the RFRA of £7500 in total that when a live-in LL comes to sell his home HMRC will consider that he has been operating a business in his home and will therefore be subject to CGT.
So there could be many homeowners who have multiple lodgers who utilise full PPR reliefs when they would have been required to pay an element of CGT for multiple lodgers.
Of course to avoid this situation a homeowner should only have one lodger.
But this is stupid as it prevents homeowners from taking in multiple lodgers to assist with rental property shortages.
But of course HMRC IS stupid.
So live-LL will OFFICIALLY only ever have one lodger at a time.
The CGT issue severely constrains the ability of those homeowners with multiple spare rooms to let to multiple lodgers.
This means lots of useful spare rooms are being underutilised at a time when rental rooms are desperately required.
No homeowner will risk CGT on his home by taking in more than one lodger.
What Govt should do is to allow any home lived-in to be able to let to lodgers with no tax to be paid on any lodger income.
Lived-in can be one day per month.
Clearly there is great scope for homeowners to game the RFRA.
Indeed I suggest that it is routinely ignored.
Govt should just accept that it is pretty much impossible to detect how many lodgers occupy a property or how much they are paying.
In these straitened times the ability of homeowners to let out spare rooms with no tax or CGT would make an invaluable contribution to accommodating those who are unable to source normal lettings.
Lodgers are a very effective way to house what previously would have been tenants.
There are reckoned to be about 25 million underutilised spare rooms.
Govt should be encouraging usage of these for lodgers by abolishing CGT for PPR and allow ALL tax free lodger income.
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