The government is being urged to consider introducing a new capital gains tax on all residential properties in the UK to help raise tens of billions of pounds and avoid relying on future generations to pay off Britain's debts, including the cost of financing the response to the coronavirus crisis.
A new think-tank report estimates that the Treasury would raise in the region of £421bn over the next 25 years by imposing a new ‘Property Capital Gains Tax’ on all homes sold in the UK.
With Britain facing an unsustainable national debt and stagnant growth, the report from the Social Market Foundation demands radical change to raise significant extra tax in order to avoid blighting the lives of future generations.
The tax could be set at 10% of the increase in the value of the property since it was last sold, according to former banker and actuary, Michael Johnson, who compiled the report.
The Social Market Foundation believes that the fairest place for the Treasury to levy new taxes is “unearned” gains on residential property.
Taking account of mortgage debt, the equity in UK homes is worth more than £5trn - a figure that has more than doubled in the last 20 years.
Rishi Sunak, the chancellor, last week ordered a Treasury review of capital gains tax, looking at how capital gains are taxed compared to other types of income. The Social Market Foundation said that unearned gains on property are a better target for new taxes than workers’ earned income.
Levying a new tax on the gain in property prices when sold would raise £629bn for the Treasury over 25 years, the Social Market Foundation paper estimates. Some of this should be used to abolish stamp duty and inheritance tax on property, leaving the Treasury with £421bn to repair the public finances.
The new tax would fall largely on older people, who own most of Britain’s property, and those who inherit property and then sell it.
Based on ONS data, Johnson calculates that the average pensioner household has net property wealth of £272,900, compared to £53,700 for those aged 25-34. In total, pensioner households own £2,149bn in property equity.
Johnson commented: “The vast £5trn pool of equity in homes presents the Treasury with an opportunity to pay for the economic damage done by the coronavirus, through the introduction of a capital gains tax on the unearned gains in the value of property.
“The alternative is that the young will have to pay for a debt-laden future. They are already hugely disadvantaged, financially, relative to older generations. Asking them to bear the burden of this crisis in the decades ahead would be unfair and unreasonable.”
Johnson argues that without significant action to arrest the growth of the debt, Britain faces “Japanification”, repeating Japan’s modern experience of low growth, deflation, a huge debt-to-GDP burden and low interest rates, all aggravated by an ageing population.
James Kirkup, Director of the Social Market Foundation, said: “These reforms are bold, far-reaching and could be politically controversial: the older voters who own most British property are a powerful group. But the scale of the coronavirus crisis and the unprecedented outlook for the public finances mean that responsible politicians of all parties must be prepared to embrace new ideas and take bold action.
“Failure to act risks severe economic and social harm. A post-crisis era where the costs of the crisis fall more heavily on the young than the old could strain the social contract between the generations to breaking point.”