Bird on a Fire wrote: ↑Tue Sep 07, 2021 10:05 pm
What's the fundamental difference between investing in a property vs investing in a business, from the investor's perspective? Most investors don't have much to do with running the business, whereas lots of property owners do a bit of maintenance at least?
That aside, it's clear that inheriting stuff is even less earned, so it seems mad to give it a tax break.
These are difficult issues. The best solution to the housing issue is proper value-related annual property taxes during the period people own property, not taxes when a house is sold, be it stamp duty or capital gains.
When you own a property, you are implicitly purchasing property occupation services, what other people might pay rent to buy. The average person devotes about a third of their income to buying property occupation services in one way or another. But the local taxes we pay, especially in relation to higher value properties, are a small reflection of the taxable value of that consumption. I think you will find the
Mirrlees review of taxation, a major study of what is wrong with taxation in this country and how to improve it, makes a similar point. It was commissioned from a team led by Nobel prize winner James Mirrlees (by good luck my tutor at university), and all the best people you'd want on such a study, by the Blair government just before it terminated, and allowed to complete under Cameron. However doing taxation properly was highly inconvenient to a government
representing bought by the rich, so it was very, very quietly swept a long way under a very thick carpet.
As you correctly identify, the value increase in a property is in part property inflation, in part value gained through improvement. I have spent more on improving my present property than I spent in buying it. Moreover improvement expenses are VAT-able and new-build isn't, so I already paid tax on that part. And I'm only counting the money I explicitly paid to a builder. Like many people, we do a lot of improvement through our own labour, so its value is not transparent. We should probably avoid taxing people for the value of improvement they have already paid tax on, but that is quite difficult, albeit that people who rent out houses can claim tax allowances for maintenance expenses.
Another issue is inflation. When I bought a very tatty 3-bed semi in need of full renovation in dodgy part of town at the end of 1988 for £75k, and sold it as a fully renovated property (still in a dodgy part of town - gentrification had not happened there) for £115k in 2000, the price difference was purely inflation. £115k in 2000 was almost exactly the same, inflation corrected, as £75k in 1988. I had in fact, after deducting renovation costs, made a loss. In general, inflation corrected, the housing market did not return to its 1989 peak until around about 2000, though it seems the local market where I was living had peaked higher in 1988 than some other places.
Capital gains tax these days is charged on purely nominal gains, ie pounds before vs pounds after. Which is really confiscatory if the asset has been owned for an extended period, especially through a more inflationary period. I have no objection to explicity taxing wealth, but let's do it explicitly and properly, and not sneakily by failing to correct for inflation on what is supposed to be a capital gains tax. Inflation adjustment used to be allowed, as it really had to be at a time when highly inflationary times were present, but some chancellor in need of some money and trying to do it in a sneaky way most people wouldn't notice, got rid of it. It might have been Mr Brown, he did a lot of things like that. Our tax system was seriously a lot worse after he'd been at it.
Another issue is that people need to move house. Suppose you buy a house for say £200k, and the market moves it up to £300k, and you need to move house, to another house costing £300k. But if you are taxed at 40% on he £100k "gain", then you are £40k short. So that would result in a lot of people not moving house unless they really, really had to. It's bad enough that they pay stamp duty, another really stupid tax.
Inheritance taxes are another difficult issue. The best solution to inheritance tax is to tax recipients, not estates. Again, I think every sensible commentator on tax has been saying his for a long ime. But it is not convenient to a government
representing bought by the rich to do it properly, as it would result in rich people paying more tax. Since most countries are run by governments
representing bought by the rich, we can't even point to implementations elsewhere. Each inheritance recipient should be taxed on their inheritance receipts according to their own financial circumstances, and according to how much inheritance they receive. This encourages estates to distribute money to poorer people and to avoid concentrating inheritance receipts on a narrow range of lucky people. People can perhaps have an individual inheritance tax allowance, which they can spread over the years, so that if they receive multiple legacies, they are taxed overall together.