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Reform the tax system to increase the effectiveness of the housing market

AAT proposes alternatives to the Prime Minister’s plans to improve housing access.

Earlier this month, the Prime Minister set out plans to help first-time buyers, increase access to homes and extend the right to buy.

The proposals received a generally negative response with the Daily Telegraph stating the plans are, “disjointed and ill-considered” and the Independent describing them as a “godawful mess”. Labour MP Lisa Nandy derided the plans as “absolutely unworkable” and Liberal Democrat deputy leader, Daisy Cooper MP, said the policy announcement was “hot air and waffle.

In response, AAT has alerted policymakers to a range of alternative reforms that would help make the housing market in the UK more effective by improving the tax system.

Better targeting of Capital Gains Tax (CGT)

Some have argued that the general CGT rate be increased to mirror investment property (18% or 28%). Landlords would doubtless prefer a reduction to match the general rate of 10% or 20%. An arguably fairer change, which would also raise revenue, would be for the rate for investment property to be permanently reduced and the general rate permanently increased. This would mean reducing the four different tax rates to two, with a simplified system effectively splitting the difference by charging 14% or 24% on all gains irrespective of their nature.

The higher rate of CGT for property is having an increasingly negative impact on the housing market where numerous recent tax changes have made buy-to-let an increasingly unattractive proposition for many landlords thus limiting any increase in rental properties at a time of high demand (and therefore increasing rents) whilst the increased CGT liability prevents existing landlords from selling their property, contributing to higher house prices due to limited supply.

The National Residential Landlords Association produce a regular “Landlords Confidence Index” which consistently shows that at least a third of landlords wish to sell their properties. This has not translated into action, with many landlords effectively stuck in a business that they wish to exit but cannot.

Increase the rent-a-room relief threshold

The tax-free threshold for rent-a-room tax relief has not increased since 2016. Had it done no more than increase in line with inflation, it would today be almost £9,500.

So, to encourage greater numbers of room rentals, increasing the opportunities for employment mobility for tenants and additional income for landlords (especially important during the current cost of living crisis) AAT recommends that this relief be increased to £9,500 from April 2023 and that it increase in line with inflation (CPI) on an annual basis thereafter as a means of future-proofing the relief, ensuring it remains fit for purpose and reducing the need for future HM Treasury review.

Properly address the second homes loophole

Thanks in large part to a successful AAT campaign, this loophole which sees both Council Tax and Business Rates avoided, will reduce from April 2023 with a new requirement to make a property available to let for at least 140 days and actually let for a minimum of 70 days coming into force.

However, AAT does not believe this change goes far enough and there should instead be a requirement for a property to be made available for a minimum of 210 days a year and for it to be actually let for 105 days in order to qualify for relief. This would bring it into line with various tax reliefs and allowances that are already available for Furnished Holiday Lettings.

Bold yet simple reform of Stamp Duty

As AAT has long recommended, Stamp Duty liability should be switched from the buyer to the seller.

This would remove every single first-time buyer from Stamp Duty liability, irrespective of the house price, without a complicated, bureaucratic and costly First Time Buyers scheme as operated at present (saving the taxpayer the £675m a year cost).

It would also help more people get on the property ladder by reducing immediate upfront costs for ALL buyers.

Crucially, it would also maintain substantial multi-billion-pound revenue for the exchequer. Although those paying will change, the amount will not.

Such a change would make Stamp Duty fairer by improving buyers’ ability to pay. Those moving up the ladder will pay duty on the lower-priced house that they are selling, not the higher-price one they are buying.

Finally, it would partly address the issue of intergenerational fairness. The only homeowners having to pay more than at present will be some downsizers (just 7% of all home movers) who are usually older homeowners. In most cases, although not all, downsizers will have little or no mortgage to pay and will have significant equity. Downsizers are therefore likely best placed among all homeowner types to pay a little extra, certainly better placed than first-time buyers who are typically the younger generation. Furthermore, many “downsizers” buy a smaller property that costs broadly the same or in some cases more, than the property they are selling.

Some argue that such a reform would see existing homebuyers being taxed twice having paid Duty to buy their property before a change came into force and then paying to sell after any liability switch takes place. This completely ignores the fact that they will still be much better off than under the current system because they will not pay any tax when they buy their next home. The double taxation argument is therefore redundant except in the very limited circumstances where a seller never ever buys a property again.

AAT does not believe switching Stamp Duty liability is a panacea, but it would be considerably fairer, simpler, more effective and cheaper than the current Stamp Duty regime.

Summary

The above AAT policy recommendations would cost just a fraction of the plans announced by Boris Johnson earlier this month and would almost certainly be more effective in improving the current housing market in the UK.

What do you think? AAT is keen to hear your views on this issue and with this in mind, please don’t hesitate to get in touch and let us know: phil.hall@aat.org.uk.

Phil Hall is AAT's Head of Public Affairs and Public Policy.

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