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.”