While most of us agree with the need to pay tax, many of us also believe that we pay too much. So rather than doing anything illegal we find legitimate ways of avoiding paying over the odds.
At the moment there is a cut to UK transaction taxes (stamp duty in England) until March 31. As a result people who were thinking of moving next year have instead decided to move this year to take advantage of the saving. This will give us a spike in sales followed by a lull.
Likewise, when an extra 3 per cent tax was levied on additional homes in April 2016 we saw a surge of sales followed by a lull (see graph). In both cases behaviour was distorted by the change.
The clue is in the name of the Office of Tax Simplification (OTS) — its job is to suggest ways the government can simplify tax, and where possible iron out behavioural distortions. In its latest report, it gives suggestions for how capital gains tax (CGT) might be overhauled. Two key findings were that the difference between income tax and CGT rates acts as an incentive for those who employ artful accountants to classify income as profit. It also discovered a bunching of claims just below the CGT threshold of £12,300.
Not unsurprisingly this led to the suggestion that income tax and CGT be aligned and the threshold reduced. Both of these would hit landlords hard.
The average landlord who sold their buy-to-let property in England and Wales this year made a gross capital gain of £69,000, having owned it for just under ten years, according to Hamptons International. For a higher-rate taxpayer, a hike in the CGT rate from 28 per cent to 40 per cent would raise their CGT bill (excluding allowable expenses) from £15,880 to £22,680. If the annual CGT exemption is also reduced from £12,300 to £5,000, the same CGT bill would rise from £15,880 to £25,600.
As a result we could see a sell-off of rental properties in advance of any tax announcement and then the holding on to property for longer by those landlords who decide to stay.
For some time, the number of landlords selling has outpaced those buying as smaller landlords struggle to cope with financial and regulatory changes. Others have been enticed back into the market by the stamp duty cut.
OTS says aligning income tax and CGT could bring an additional £14 billion into Treasury coffers if taxpayers’ behaviour stays constant. It won’t. Already the accountants are at work.