Archive for January 23rd, 2008
23rd January 2008
Second Homes Tax-break, second time arond
It’s reported that the Chancellor is going to make a statement tomorrow on changes to his proposals for capital gains tax following strong lobbying by the CBI, FSB and others. However, another possible consequence of the changes has had little profile and that is its implication for second-home owners and the negative implicationsfor the housing market, especially in areas like rural Wales.
Basically the Chancellor announced in his Pre-Budget Report in October last year that he was going to replace the current capital gains tax regime with a single rate of 18% irrespective of how long the investment has been held. As part of this ’simpification’ he is also proposing doing away with the distinction between business assets such as stock and shares and non-business assets, including houses other than people’s principal residence.
This change will make ownership of second homes much more financially attractive. Helpfully, to make my point for me, the HMRC uses a holiday home in Devon as the first example used in its guidance notes to illustrate the effects of the changes):
“In 1995 Mr E purchased a holiday home in Devon for £100,000. He sells it in July 2008 for £250,000. The CGT due is calculated by deducting the purchase cost of £100,000 from the sale proceeds of £250,000 to give a gain of £150,000. Assuming he has no other capital gains in the tax year 2008-09 he can deduct from this the full AEA of £9,200 giving a chargeable gain of £140,800. That gain is taxed at 18 per cent giving tax payable of £25,344. “
Under the current rates the owner of a second home will face a capital gains tax bill which is 40% of the gain in the value if the property has been held for one year lesl and this tapers down to a rate of 24% after ten years. Under the new proposals, the owner on selling after four years will face a tax liability of 18% rather than the current tapered rate of 35% i.e it will be half the current bill.
This will represent a big financial incentive for people to invest in the second-home market and will inevitably have a negative effect on affordable housing in many coastal and rural areas of Wales including my own constituency. I have written to the Chancellor asking him top reconsider these proposals.
We have been here before of course. A couple of years ago the Government was proposing that second homes be included as qualifying assets in Self-Invested Pension Schemes (SIPPs). As a result of campaigning by Plaid, ledby Hywel Williams MP, the Government dropped those proposals. I’m hoping they will see sense again and stop providing perverse incentives to price yet more local people out of rural communities.