Gotten gains

Posted by: Jules Birch

18/05/2010

The rumblings of discontent are growing louder by the day over what is probably the coalition government’s most surprising new policy.

The plan to increase the rate of capital gains tax on non-business assets could have a big impact on second home owners and buy-to-let investors. And the rumbling is coming not from the opposition but from some of the government’s most natural supporters in the right-wing press and on the Conservative backbenches.

Aside from the expected plan to scrap home information packs (HIPs), the policy is the only one in the joint coalition policy document that will affect housing. 

Although the plan to levy capital gains tax (currently 18%) at the same rate as income tax was in the Liberal Democrat manifesto as part of a fairer tax system, it’s a surprising joint policy since it seems to contradict most Conservative instincts (and will potentially clobber its hedge fund donors).

That probably explains the reaction against it. One Cabinet minister John Redwood describes it today as ‘anathema to most Conservatives’ while another, Lord Forsyth, 

And the chuntering from the Telegraph is getting louder and louder. Clive Anslet, the editor of Country Life, accuses David Cameron of ‘having a go at me and my kind’ and says he should be standing up for the property rights of the middle class. Religion editor George Pitcher asks: ‘What’s the point of being a Conservative if you’ve decided to re-distribute wealth through property taxation?’

The Mail is not happy either - though it at least has the consolation of pointing out the Lib Dem minister Chris Huhne would have to pay the tax on his two homes and five rental properties. 

The effect on the housing market is harder to read. Some commentators are predicting a hiatus and falling house prices as second home owners and buy to letters rush to sell rather than effectively pay twice as much tax. Others say they are in it for the long term and for the rental yield and it will not have much effect. 

The National Landlords Association was quick off the mark with a plea for residential property investors to be given the same ‘generous exemptions’ as entrepreneurs and other businesses. 

That seems unlikely given the amount of tax involved. The Lib Dem manifesto estimated that CGT reform would raise £1.9bn a year and that would have to be found somewhere else. (Mind you, the Lib Dems’ mansion tax was rejected by Conservatives and that would have raised £1.7bn).

New parliamentary rules that ban taxpayer subsidy of mortgages for second homes for MPs also make the policy more politically possible - not that it has stopped plenty of references to flipping, bath plugs and spare rooms.

However, it’s the details of the new policy that will determine how much they hit second home owners and buy to letters - and potentially benefit first-time buyers. In between the two, and with a Treasury consultation still running, ministers will have to consider the effect on supply in the private rented sector of a move that will benefit institutional investors at the expense of individuals. 

There’s still lots of lobbying time between now and the emergency budget on June 22. Can it really be only five weeks since the Conservatives forced the outgoing Labour government to drop a budget change that would have hit, yes, second home owners?