A rise in Capital Gains Tax (CGT) could wipe almost £2bn from the Greater London economy, a real estate investment firm has warned.

London Central Portfolio (LCP) suggested that a mooted CGT rise could result in a negative trickle-down effect on the wider economy.

A report issued by the Office of Tax Simplification (OTS), requested by Chancellor Rishi Sunak, has considered an increase in CGT to align with current rates of income tax. The report anticipated that this could bring an additional £14bn into the UK economy and would include increasing the tax on the sale of all properties which are not a main home.

However, the OTS also raised concerns there would be “significant behavioural effects” which would materially reduce this – including an impact on people’s willingness to dispose of assets and trigger a tax charge – increasing the extent to which CGT has a “lock in” effect.

“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,” LCP CEO, Andrew Weir, commented.

“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 Stamp Duty Land Tax (SDLT). This resulted in the government missing out on additional tax take and the market never fully recovering, with transactions slumping by 25.08%.

“If buying patterns in 2016 were repeated, almost £2bn is estimated to be wiped from just the Greater London economy let alone the rest of the UK, as manufacturing and building trades are affected as well as property related professional and service industries.”

If transactions followed the same trend following the implementation of the proposed CGT changes, LCP estimated that £1.7bn per annum will at least be wiped annually from ancillary businesses in London which service the housing market. The firm said the damage would be exacerbated by an estimated £630m per annum loss in stamp duty and VAT receipts, as property transactions fall and the service sector decreases.

“Businesses that have already struggled due to the COVID-19 pandemic will be victims again,” Weir added. “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.
 
“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.”

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