With the Budget approaching, there will be no shortage of advice for the Chancellor.

Some of it will inevitably amount to ‘tax if you must, but tax someone else.’

But beneath the usual political banter in the comments on our story about Capital Gains Tax this week, Landlords were proposing serious alternatives.

At the heart of the discussion is a fairly simple question. Should CGT be charged on the increase in the cash value of a property, or should some allowance be made for the fact that the value of money itself has fallen during the years somebody has owned it?

Jo Pearson put the argument bluntly: much of the nominal gain on a long-held property can simply reflect inflation.

Michael Foley’s solution was to restore indexation or taper relief – mechanisms previously used by the tax system to recognise inflation or the length of time an asset had been held.

But Jo Westlake supplied the numbers. She estimates that one of her longest-held properties would produce a CGT bill of around £76,000 today. With indexation, she calculates that would fall to somewhere around £20,000 to £22,000 even if the tax rate itself were increased to 40 or 45%.

Another property, she says, would produce an £88,000 bill today against around £50,000 after indexation.

Her argument isn’t that genuine gains shouldn’t be taxed. In fact, she specifically accepts paying CGT on increases in value above inflation.

Her more interesting point is what happens next.

At today’s figures, she isn’t inclined to sell. With indexation relief, she says she would consider selling properties that no longer fit her portfolio.

And suddenly our discussion isn’t simply about how much tax landlords should pay.

It’s about what a tax makes people do.

There is some evidence for that argument.

When the higher residential CGT rate was cut from 28% to 24% in 2024, the OBR expected the lower rate to unlock some property disposals that would otherwise not have happened – and actually increase Exchequer revenues in the short term.

Subsequent HMRC figures showed residential disposals subject to CGT rising sharply, although other factors, including speculation ahead of the October 2024 Budget, mean we can’t attribute that increase simply to the tax cut.

Slooky May approaches the same issue from another direction, arguing that a large CGT liability can leave landlords effectively locked into properties they might otherwise sell. Capital that could move into another property, another business or another investment simply stays where it is.

Which raises an intriguing question: when does a tax designed to collect money begin to prevent the transaction that generates the tax?

Not everybody in the comments favoured indexation.

Nigel Spalding offered the shortest tax policy of the week: “Just abolish CGT.”

Richard LeFrak went in another direction. Among the fireworks was a rather more radical suggestion: forget indexation calculations and charge a much lower flat percentage when a property is sold. His argument is that simplicity and a lower liability would encourage transactions rather than giving owners an incentive to sit on assets indefinitely.

I’m not going to adjudicate between them but there is one final argument worth considering.

Would reducing CGT necessarily reduce the overall tax take?

Jo Westlake argues that a property sale doesn’t generate only CGT. A purchaser may pay Stamp Duty. Solicitors, estate agents, mortgage businesses, builders and retailers may benefit from the transaction, generating VAT, corporation and income tax along the way.

Her summary is rather difficult to improve upon:

“24% of nothing is nothing.”

And perhaps that’s the useful discussion to have as October 28 approaches.

The question isn’t simply whether landlords should pay more tax or less tax. Nor is it whether CGT should be abolished, indexed, tapered or charged at a different rate.

It’s whether the tax system should take account of how people respond to it.

Because a tax that looks highly lucrative on paper may be rather less impressive if people arrange their affairs so that they never have to pay it.

Until next time,

N