Housing and Taxation: The self over all others

Whilst taxes levied on UK residential property are never out of season for the “water cooler conversation”, the discussion is manifestly dialled-up ahead of General Elections. Indeed, such is the visceral and selfish nature of our opinions on “housing as an asset”, detailed promises of to how to change tax on our bricks and mortar, never appear concretely in Manifestos.

The reality is that parties claiming to be redistributive, fear that those pledging fealty to them, could, in the privacy of the ballet booth, discretely disavow and cast their vote elsewhere. A highly likely outcome, if voters thought the changes pledged to how private property was taxed, went against their “familial financial interests”.

With the above in mind let’s please consider swirling rumours that an incoming Labour Government would remove the CGT exemption on the sale of main residences, as well as quickly revaluing the long-standing (1991) taxonomy of council tax bands.

I have no doubt efforts will be made to publicly distance the PLP from the idea that such development would be immediate policy once elected. This is not to say Labour would not do so, merely it will not make THE ERROR ex ante of Metropolitan Middle Class Tax Hikes, being election promises/threats.

Whilst I am speculating on its influence over voting, I believe that the real/imagined expectation of it introducing a Mansion Tax, were it to have won the General Election, played greatly against Labour in 2015; and also contributed significantly to the Lib Dem’s exceptionally poor showing.

The reality is that for all that divides the UK electorate across party lines, there is one very common view; those ON THE UK main residential property ladder, believe it to be Tax-Free and Do-Not-Disturb. Indeed, the fact that the Conservatives have promised, were they to win, the scrapping of Stamp Duty for first time buyers (FTBs), plays into this.

So much then for the politics of UK property taxation, let’s move to its economics.

To be clear, stamp duty is both a regressive tax and creates unnecessary friction to a well-functioning residential market. Furthermore, exempting CGT on the sale of main residences, gives the UK less a housing ladder, as an accelerating pricing escalator. As for “Council Tax”, re-rated or not, this too is divorced from ability to pay out of income, and so too is regressive.

Let me consider UK residential property matters differently. Imagine that a student of economics was asked to present an illustration of a perfect fiscal model for residential taxation. And suppose he or she pointed to the UK’s example. To me, that would constitute a Straight FAIL. Were another student to be asked how a political party could deliver UK residential solutions, I would expect little more than youthful dogma that tax matters MUST change for the benefit of those entering the market, not those already entrenched. An answer which despite my generous grade, if presented to their property-owning parents, would see them marked-down, as a straight FAIL.

What might Reeves reveal?

To those making confident claims of what a New Government will mean for the UK economy, I say what of wide-ranging uncertainty?

Despite what it has rather fluidly Manifested, none can honestly claim foresight of the precise policies Labour pursues, and/or their timing; or how these might impact the UK’s real economy, and crucially, are received by capital markets. Manifestos are in short, as vague as football punditry, and as binding as a prosthetic handshake.

Were it not for lack of domestic clarity, the UK’s economic future is further clouded by outside imponderables. For one, in the run-up to and aftermath of, a seismic presidential election on Nov 5th, what awaits the US real economy, and ITS considerably impactful capital markets? The UK’s fortunes have to deal too with opacity across European waters, and in particular, the core but diverse EZ; with no clarity how the war in Ukraine unfolds.

The reality is all the above would have been with us regardless of this General Election, or its outcome. Admitting of all uncertainty, here are MY best guesses of what Reeves will Reveal, if not necessarily in her teaser Budget, or Autumn Statement, certainly no later than March Budget:

1. Alterations to taxes relating to residential property will be a mix of non-retrospective, immediate and delayed.

• If CGT is imposed on the sale of main homes, it will NOT relate to present owners, and will come with an
  overhaul of IHT, property bequeathed IHT free, but carrying a CGT liability;
• any change to Stamp Duty will be immediate, to avoid fuelling a surge or stalling in transactions;
• any new approach to Council Tax to be from 2027, very possibly part of a wider devolution policy and local
  income taxation;
• PRS policy will await recommendations of a White Paper;

2. Much needed changes to UK Commercial property taxation will come with a delay, and with a shift from what is the abstract ’valuation’, to actual revenue generation, VAT itself supplanted;

3. New taxes to be carefully ‘presented’ as Green, NOT mean; socially sweet, NOT politically bitter;

Whatever it contains, the Government’s initial Budgetary Statement will be delivered conscious of how “markets” reacted to the ill-fated one under the brief tenure of LT. It will also be written so as to receive OBR ‘approval’; and not to spook the MPC.

The 1st Reeves Reveal will in short be a careful pathfinder towards her Autumn Statement and then truly substantive Spring Budget.

So much for the fiscal side of things, where every effort will be made not to spook the UK’s monetary horses: £ and Gilts. Here is what is certain not to happen, EVEN IF IT SHOULD.

With a considerable Majority and with a policy agenda to be Green – so accepting inflationary re-shoring to lower the UK’s carbon footprint, and raise its CSR score more widely – the Chancellor should insist on a Bill revising the 1-3% inflation range, “a mere” 100bps higher. Whilst failure to do so will ensure stubbornly elevated base rate, doing so would need some Balls, Ed.