The UK government has revealed receipts of £6.9 billion relating to capital gains tax on property sales during the 2014/15 tax year. This is the highest rate since the worldwide economic crash of 2007/8 and compares to £3.9 billion in receipts just two years ago. This will surprise many people, especially when you consider the state of the UK economy, but it perfectly illustrates the strength of the UK property market.
Rising property prices
Over the last 10 years we have seen Greater London property prices rise on average by 86% which is a phenomenal performance by any stretch of imagination. This perfectly illustrates why capital gains tax receipts for the UK government have increased dramatically from property sales. These figures include both individual capital gains tax and those from company related property transactions. Even though there is some doom and gloom surrounding the UK market at the moment, in light of the Brexit vote, many experts believe the long-term trend is still upwards.
Extracting money from the property market
One of the often ignored issues regarding capital gains tax is that this tax income stream takes money out of investment markets and in this particular instance the property market. These are funds which could have been used elsewhere in support of the UK property market but instead are going to the UK government. There is no way that this property tax income will ever find its way directly or indirectly into the UK property market so it is money which is in effect draining away from the sector.
Tax rates
Those looking to defend the government’s ever increasing capital gains tax income from the property market will no doubt highlight a reduction in some capital gains tax rates. The higher rate has fallen from 28% down to 20% with the basic rate falling from 18% to 10%. However, the buy to let and second homes markets have been excluded from these reductions and will continue to contribute significant capital gains tax to the government’s coffers.
Tax planning
While it is disappointing to see investors hit harder and harder from a capital gains tax point of view, not exactly encouraging long-term investment, this does highlight the need for long-term tax planning. At this moment in time a primary residence is exempt from capital gains tax but this situation changes if you buy a second home or you leave a relatively expensive property in your will. So, whether you are buying property as an investment or perhaps you have more than one home you should ensure that you utilise any tax breaks available to you and your family.
Conclusion
It will come as no surprise to those who follow the UK property market to learn there has been a significant increase in capital gains tax receipts for the UK government. However, this comes at a time when the UK economy is starting to run out of steam so surely the government should be encouraging further investment?
The UK property market has always been a soft touch for governments looking to shore up their coffers and fill budget black holes. However, there will come a point when over taxation of the sector forces investors to look elsewhere thereby reducing support for the core UK property market.