An estimated £2bn could be wiped from London’s economy due to the proposed rise in Capital Gains Tax, according to London Central Portfolio (LCP).
A report issued by the Office of Tax Simplification (OTS), requested by Chancellor Rishi Sunak, has considered an increase in Capital Gains Tax (CGT) to align with current rates of income tax.
LCP has conducted research on the potential adverse impact on the residential property market and wider economy by considering the effect of the previous property tax hike in 2016.
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The data shows that transactions slumped in Greater London by 25.08% year-on-year following the introduction of Higher Rate SDLT in April 2016.
As a result, annual transactions have never recovered to pre-2016 levels and were down 32.2% prior to the onset of the COVID-19 pandemic.
LCP note that if transactions followed the same trend following the implementation of the proposed CGT changes, an estimated £1.7bn per annum will, at least, be wiped annually from ancillary businesses in London which service the housing market.
In addition, this would be made worse by an estimated £630m per annum loss in stamp duty and VAT receipts as property transactions fall and the service sector inevitably decreases.
Andrew Weir, chief executive of LCP, said: “Tempting as it may be for the chancellor to target CGT as a cash grab which may be politically popular, the law of unintended consequences may mean it has the reverse effect.
“Transactions will be effectively ‘brought forward’ ahead of the implementation date, similar to March 2016 where monthly transactions soared to a 12-year high to get ahead of higher rate SDLT.
“LCP anticipates that buyer profiles will also change as current owners are replaced by those holding a longer-term view with no intention of selling assets.
“This would create a transactional lull over the next few years with a further knock-on effect to the UK economy.
“Businesses that have already struggled due to the COVID-19 pandemic will be victims again.
“With the end of the furlough scheme in March 2021, the UK is likely to see a further increase in unemployment from these industries reliant on transactions.
“This does not take account of further losses in the struggling retail and leisure sectors dependent on a thriving international community who have traditionally invested in London but would be increasingly deterred.
“With the economy facing a period of slower growth, the exchequer should be encouraging people to spend their money and boost the economy in the process.
“A rise in CGT is neither certain to increase tax revenues nor likely to stimulate investment in the housing market.
“It has never been more important to have a well-thought-out strategic approach, looking at all the variables, rather than a short-term tactical ploy.”