What Will Labour Do To CGT?

There have been a number of articles in the press recently that suggest that Labour might align CGT rates with income tax rates. This would have a catastrophic impact on landlords who wish to dispose of an investment property or business owners who wish to retire.

At the moment a higher rate tax payer who sells their business pays tax at 10% on the first £1 million of the sale proceeds and 20% of the balance. A landlord who sells an investment property pays tax at 24% on their gain. If rates were aligned with income tax the rate payable would be 40% for higher rate tax payers and 45% for additional rate tax payers (excluding national insurance contributions and any reduction in their personal allowances). In other words, the tax rate would increase by up to 400%.

These changes would have an appalling impact on the UK economy and would be grossly unfair to investors. Let’s look first at the impact on landlords. At the moment landlords make their investment decisions based on the total return that they expect to achieve from a property.

This varies hugely in different parts of the country. For example, in prime central London the rental yield has typically been less than 2% in recent years but capital growth has been very strong. If a landlord got their timing right this could have added another 8% giving a total yield of 10%.p.a.

In the provinces where properties are usually cheaper, the yields tend to be much higher but there has been much less capital growth in recent years. A typical investor may therefore still achieve a total return of 10% but it would be made up of 8% rental yield and only 2% capital growth.

A change in CGT would have many unintentional consequences. Landlords would be much less likely to invest in property particularly in London and the South East. This would reduce supply and drive up rents. If notice were to be given of the tax change there would be a stampede of landlords trying to sell before the tax changes took place. And once the new tax rates came in landlords would refuse to sell their properties so the government would end up with 40% of nothing. After all, CGT is not payable upon the death of the tax payer.

An increase in CGT rates would also be very unfair unless there was a proper allowance for inflation. Without this there would be many instances where an investor would make a loss in real terms after inflation but still end up paying tax on a profit that they never really made.

The impact on business owners would be even more unfair. A significant percentage of business owners earn less from running their letting business than they would earn by taking a salaried job with one of the major corporate chains. The only thing that squares the circle is the one-off bonus that they get when they eventually sell their business.

We have already seen a huge rush of business owners rushing to sell their business before the first Labour budget in the autumn. If tax rates quadruple ,the number of businesses that are sold will reduce dramatically.

Business owners have several other options.  They can just carry on working well beyond the normal retirement age. They can put a salaried manager in to run the business on their behalf. They can give the business away to a family member or to the staff.  Or they can shut the business down and use its remaining assets to buy an income producing asset such as a commercial property. In all cases the government will end up with 40% of nothing and the owner will end up with a poorer and less peaceful retirement than they could otherwise have had.

The worst problem however is that businesses that are being run down are usually less vibrant and less profitable than businesses that are owned by younger and more ambitious people.  This means they employ fewer people, and pay less corporation tax, VAT and PAYE which is bad for the UK economy and more than outweighs any additional revenue from increased CGT rates.

An increase in CGT rates might earn the government positive headlines in some of the newspapers about taxing the rich but it will not raise any revenue and it will have a hugely negative impact on the UK economy. I sincerely hope therefore that the government will think again.

Adam Walker is a business sales broker and management consultant who has worked in the property sector for 42 years.