Rachels proposed capital gains tax on your home - would it be legal?

 Rumours are rife that Rachel plans to introduce Capital Gains Tax on the sale of your home.  

Currently there is Private Residence Relief which means your home is exempt from Capital Gains Tax however if that changed would it be legal?

Currently people move home every 23 years on average.  In my youth I moved home probably every year but once kids came along that all changed.  I have lived in my current home for 25 years and have no plans to move (other than to flee high tax Britain).

My wife's parents have lived in their home for 60 years. So their house would be subject to pretty much 100% capital gains....

So if Rachel introduces the tax in 2025, that means my home, which has appreciated significantly in value over the last 25 years, could be subject to an eye watering tax bill.  Capital Gains Tax no longer has indexation relief (allowance for inflation) so tax would be liable on the whole value of the gain (roughly 80% of the property).

However the statue of limitations means that HMRC cant' go back more than 7 years for genuine taxation (ie not fraud). So it's anybody's guess what the REAL valuation of a property was 7 years ago.  Unless you were selling it at the time 7 years ago (or bought it 7 years ago) then any valuation is speculative - selling always comes down to what someone is prepared to pay at the point in time.  

I do know 4 years ago was COVID which was peak property time as people fled the cities in search of houses with gardens and outside space. So in real terms my home is probably worth less than it was 4 years ago and therefore probably a similar number to 7 years ago.

Tax law is exactly that - it's legal legislation.  Therefore in order to introduce CGT on a home it cannot be retrospective before the law existed therefore the value of the house should be baselined at the point at when the legislation came into effect not at the point  which the home was purchased.

However laws and legality never stop government.  Here's a quote from the government

"Retrospective tax legislation imposes or increases a tax charge prior to the legislation being introduced. Although this is a controversial practice, retrospective provisions are often introduced to mitigate the risks to the Exchequer from tax avoidance."

So Rachel could make the tax retrospective.  If the period went back further than 7 years from the legislation, I suspect there would be a HUGE class action against the government.  I for one would be supporting the litigation !

With investment properties, you can claim capital gain tax relief on expenditure eg a new kitchen, bathroom etc.  It would be extremely unfair for these reliefs not to be applicable to CGT on your home.  Now here's the BUT. In order to claim these reliefs on investment properties you need the receipts. If you dont have them then you will be paying TAX on money you have SPENT.....

I suppose the positive news is that the Stamp Duty you paid when you purchased your home will now suddenly become an allowable deduction as would estate agent fees, legal fees etc to offset the CGT liability ! These are recorded in legal documents so wouldnt be too difficult to obtain from 20 years ago. I can now see why the rumours are floating that stamp duty is going to be abolished !

Now I suspect most home owners do not keep receipts from 20+ years ago for improvements they made in the past.  I certainly dont have the receipts for the large extension I built on the back of the house.  I dont have receipts for the new kitchen.  I dont' have the receipts for the new bathrooms etc. Therefore I think it would be totally unreasonable of Rachel to retrospectively apply these.  I wonder whether Kier has kept all his receipts on his £2M house? Or what about Angela with her knock off Stockport  council house where she made a £48,500 profit ?  It does mean people who buy their council house at a discount will end up paying more tax as it was purchased below the market rate ! 

Another serious problem would be equity release.  CGT is payable on the notional profit and doesnt take any debt into consideration.  If you have released equity from the property, there's a real possibility that the sale of the property would not cover the residual debt and the tax.  Tax is the highest priority of debt therefore the lender may actually have a bad loan as the remaining equity is not the security they thought and the residue from the sale would not be sufficient to settle the debt.  

Once lenders discover that security on a loan is not as solid as they thought it could trigger a banking crisis as lenders post loss provisions in their accounts.  It also means that banks will become increasingly unlikely to issue mortgages on properties where the occupiers have lived there a long time and there is a large equity which could be subject to CGT.

Elderly home owners who wanted to live off the equity in their home in retirement will be trapped.  If they sell they will be hit with a huge tax bill and on the flip side, lenders will not be willing to take their home as security for equity release except at punitive rates. 

So is Rachel just fishing by feeding the media with scare stories in order that the actual tax changes she makes in October somehow seem more tolerable. Or are we entering into a period where the contract between tax authorities and tax payers is going to become increasingly unfair?

Watch this space.