Second Homes and Capital Gains Tax

The Bank of England - not my second home. Image via Wikipedia

It would seem that a huge amount of rubbish is being written about the widely trailed plans to restore the link between the rates applied to Capital Gains Tax (CGT) and Income Tax, in particular the apparent concerns of all those people - each of them apparently a core Conservative voter - who own second homes.

At the weekend, David Cameron is reported to have said that second home ownership was not "splendid" for the economy. Of course, in many areas there are concerns that second home owners are pricing out the locals who have to move far away - fishermen can no longer afford Fisherman's Cottage, and the local vicars can barely afford the new Rectory, let alone the Old Rectory which was sold off years ago.

But without going into the rights or wrongs of second home ownership, the idea that somehow these people will "suffer" if their GAIN on the sale of the property is taxed at the same rate of income is quite bizarre.  Property ownership in the UK has been, over the long term, a good one-way bet for many years.  There is no risk taking with this sort of "investment", which is, to coin a phrase, as safe as houses. Although frankly, the idea that a second home (as opposed to a buy-to-let investment) is in fact an "investment" is pretty odd.

On the other hand, it was the last Labour government (hiss, boo) which created the anomaly of taxing captial gains at a lower rate to income (whether earned or not) and did away with many of the distinctions between business and non-business assets - and dismantled the reliefs (taper and indexation) which rewarded those who held investments for the long term.  Instead the new 18% rate was available for any asset, no matter how long it had been held. This encouraged some people to arrange their affairs so that income became a capital gain (and taxed accordingly) or to invest for capital growth rather than a steady income return - which surely pushed up property prices.

So when George Osborne looks at the detail of the CGT realignment with Income Tax, it would be extremely sensible if taper relief and indexation allowances are restored, and that the exemptions, such as Entrepreneurs Relief and schemes such as the Enterprise Investment Scheme are maintained to encourage investment in real businesses. As CGT rates rise, these schemes will make investment in real businesses all the more attractive, which should be widely welcomed.

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Non-doms: Gordo's got it wrong

I have been wrestling with the issue of the much trailed non-dom levy. On the one hand I am all in favour of people paying their fair share of tax, but on the other I am dismayed that it is being done in such a cack handed manner which is likely to damage the economy. Whilst I have little sympathy with US businessmen who are to be taxed on their worldwide income or pay £30k since a UK citizen working in the US would not even get the benefit of that option, I can see that the arbitrary change is a bit tough on people who have managed their affairs in the expectation that the tax system would remain stable.

However, rather than imposing the flat, reggressive £30k levy, there are a couple of sensible reforms that the Chancellor could make in a few weeks which would not be such an obvious cause celebre amongst the ex pat business community.

1. Change the rules so that any income derived from employment based in or mainly undertaken in the UK is subject to UK taxation, regardless of where the payment for that employment is made. Currently, non-dom workers can be paid through off-shore companies for work done in the UK. This would be similar to the crackdown on consultancy companies, which were used as tax efficient vehicles.
2. Levy a small percentage of the value of any real property held by an offshore company. Lots of properties (including the entire HMRC estate, via Mapeley STEPS) are held in offshore properties to be tax "efficient" and where properties are held in an SPV, this SPV can be sold avoiding the need to bring income into the UK or pay UK stamp duty as the only transaction is the sale of the SPV, in the BVI or whereever it is located.

There is no reason why foreigners working and living in the UK should be getting a free ride on the work done in the UK or property owned here. But the compromise (to keep a competitive advantage) is that we do not seek to tax money earnt and kept offshore.

Osborne does well

When I finally made it out of bed just after 8am this morning, I was just in time to hear George Osborne on the Today programme announce the most original and intelligent new policy of any political party in decades. A flat levy of £25,000 on non-domiciled tax payers is a creative way of raising money from a completely new source without the tax payers seriously resenting (or in many cases even being effected by) the new tax. Anyone earning more than about £70,000 per year offshore will be paying a lower effective rate of tax on this income than if they brought the money onshore and in many cases (e.g. US citizens) will be able to off-set the £25,000 from their other tax bills under double tax treaties.

It is very unlikely that there are many non-domiciled tax payers who are low earners - a nurse from overseas is hardly likely to have a private income arising in her home country which makes it worth claiming non-dom status, or whether she would have registered as such - she would pay tax on her UK income via PAYE and that would be that. This means that very few of the non-dom tax payers included in the statistics will not contribute more under this proposal.

The criticism that it would not raise "enough" money is a red herring - it will raise new money - that's the point.

On the other hand IHT will be abolished for the majority of people. The criticism that this is a re-distribution from the very rich to the quite rich and therefore irrelevant to the majority of people is again misplaced. The idea that policies should only be developed that help the poorest - or the majority - is foolish. For one thing, a government needs to look at all aspects of the tax system. Secondly, in an aspirational society, people look at the taxes which will effect them if they get rich. Historically, tax cuts for the rich have stimulated growth and lead to an increase in tax revenues. The Conservatives have always prospered when they have pandered to the aspirational nature of the British people. The policies announced today are creative and sensible and are, I hope, the first of several good ideas which will mean that the Conservative Party forms the next government.