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Options for taxing main residence capital gains

Adam Corlett
Adam Corlett
Jack Leslie
Jack Leslie

Over the past 30 years, the total value of household wealth in the UK has risen from three times national income to well over seven times. Inflation-beating house price growth and high ownership rates have combined to add around £3 trillion of housing wealth from main residences to that total – accounting for around a fifth of all British family wealth today.

This report provides new analysis of the huge unearned, unequal and untaxed capital gains on main residences, shows that they create unwanted economic side effects such as low home ownership among the young, and sets out how the tax system could be reformed in response.

Main homes, unlike other assets, are not subject to Capital Gains Tax. Which, combined with the limited scope of Inheritance Tax, means a substantial driver of rising wealth in the UK is being ignored by the taxman. At a time when taxes on earnings and businesses are rising, it is worth exploring whether reforms to Capital Gains Tax might be a source of additional revenue – either allowing for lower taxes elsewhere or greater investment in public services.

Key findings

  • The least-wealthy third of households have gained less than £1,000 per adult, on average, from rising house prices this century, and the wealthiest 10 per cent have seen an average gain of £174,000.
  • The average gain per adult was £76,000 in London, but just £21,000 in the North East of England.
  • A new tax on main residences would require carefully thought-out design choices, including: accounting for past-capital gains; not disincentivising house moves; ending forgiveness of capital gains at death; and allowing deductions of costs.
  • Plausible designs of a tax could raise between £4 billion and £11 billion a year.
  • Inheritance Tax could be an alternative avenue of reform, for example abolition of the Main Residence Nil-Rate Band might raise as much as £3 billion a year.

Further reading

Ineffective Savings Accounts
·
Molly Broome
In too deep?
The impact of the cost of living crisis on household debt
·
Felicia Odamtten, Simon Pittaway
Precautionary tales
Tackling the problem of low saving among UK households
·
Molly Broome, Ian Mulheirn, Simon Pittaway
Adam Corlett
Adam Corlett Principal Economist
Jack Leslie
Jack Leslie