Consider the Present Value of assets when calculating capital gains tax

by Readers Question

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11:29 AM, 4th April 2016, About 9 years ago 12

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I became a landlord to manage my own destiny as my pensions are poor due to redundancies etc.

I contend that

1. Private landlords can only use 1 year’s capital gains allowance. This is unfair
2. The current method of calculating a capital gain is wrong and does not reflect the true value of an asset at the time of sale.
3. The costs allowable against a capital gain are a sop

There used to be taper relief on capital gains. This was withdrawn approx. 2008 accompanied by accusations that the system had become to complex.

Currently, the Personal Capital Gain is a simple calculation : SALE PRICE less PURCHASE PRICE.

This is understandably simpler but if an asset is owned for many years the true present value of the asset is ignored. As a crude example, (not trying to make anyone suck eggs, just laying out the point) :

£1 today is £1.16 in 10 years at 1.5%.
If I sell for £1.20, I believe my capital gain to be £1.20 – £1.16 = 4p.
The Government thinks it is 20p.

The Government’s calculation is a distortion of reality and the allowable costs are a sop.

A personal example, approx. figures.

Purchase 2002, £180k.
Value 2015, £350k.

Using ONS stats, compounding annually.

Present value – compounded RPI = £269k
Present value – compounded CPI = £245k

Capital gain RPI = £81k
Capital gain CPI = £105k
Capital gain – Government’s current method = £170k

As far as I can see, the Government’s method of calculating a capital gain extends to most things eg. Works of art, Classic cars, a car boot lucky find etc. and I may be approx right in saying that these examples at least benefit from being able to use 2 years allowances. BTL’s are limited to 1 year.

Also, I can see the incentive for the Treasury to hold fast as the potential CGT revenue probably figures in the country’s accounts.

I can find only one petition on the Government’s portal that is related which currently stands at 113 signatures. It asks for a CGT moratorium for landlords who sell to First Time Buyers.

I can see that the Elders of this forum are active and are lobbying on various issues; is this one of them?
Am I right?
Have I missed a point?
Should Government be lobbied?
Does asking for a present value calculation conflict with other actions of which I am unaware?
Is another petition worth it and would it make 10,000 signatures?

Thanks for reading.

Your thoughts?

Hamish

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Comments

Hamish McBloggs

13:37 PM, 12th April 2016, About 9 years ago

My 'currently 1.2%' was a 2015 RPI 'averaged' figure.

ONS figures today (12 April 2016) show that the CPI has risen to 0.5% (Government's preferred measurement)

RPI (which includes housing costs) 1.6% in March 2016 up from 1.3% in February 2016.

Bank of England's target is 2%.

At 2% your future £1 would have to be £1.22 in 10 years just to keep pace. (to be able to buy the equivalent 'shopping basket')

This is an absolute and fundamental distinction between staying level in 'real terms' and making a 22p capital gain.

At the BOE's target, Multiply the value of your asset today by 0.22 (1.22-1) and see how much you owe HMRC in 10 years time if you want to sell.

Then carry out a true internal rate of return calculation and reassess your investment.

You carry all the risk, seek ever more inventive methods of circumnavigating this issue ... HMRC just sit and wait and governments close loopholes.

Have I got the wrong end of the stick?

What is the argument in favour of HMRC's calculation method?

Maybe broaden the scope of discussion a bit?

Taxes are used to 'encourage' certain behaviours (promote family units perhaps), manage risks to a country's stability (Mark Carne is concerned), perform social engineering (unaffordable local authority social housing), respond to public demands for balance and fairness (all BTL landlords are the root cause of rising house prices)

etc.

The argument isn't necessarily entirely about present value.

I will keep an open mind. The better the balance the better any change.

I note that house prices are up 7.6% (this is just the headline, I guess more detail will show regional variations and give a better meaning to the figure).

Whatever the meaning this is 2 things to me:

1 Unsustainable
2. Even using my method of calculation I would pay more CGT.

Hamish

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Hamish McBloggs

9:11 AM, 17th April 2016, About 9 years ago

Hi All,

Just trying to stir a bit of interest.

It seems to me reading through posts here that is easier to find ever more inventive ways to negotiate CGT than to fix what I see as a serious fault.

This fault massively and unfairly benefits HMRC and rips the asset holder off.

Negotiating CGT = 'loopholes' that successive governments will close.

We need to fix the problem.

The Bank of England's target inflation rate is 2%.

£1 today is the same as £1.22 in 10 years at this rate of inflation.

Buy a £200k property for BTL today and in 10 years it is £200k x 1.22 = £244k.

Any property value greater than this is a gain.

Any property value less than this is a loss.

The government say that £244k-£200k is a gain. The government own zero risk.

I believe that in this simplified example there is NO gain. But you have complete ownership of all risk.

Perverse avoidance example:

If the rules stay the same, in 10 years I should divorce my wife. My ex wife and I sell the property to the ex- mother-in-law as part of the settlement. I later marry the mother-in-law.

It doesn't work out and a day later, divorce, sell the house, pocket the money and remarry my wife.

Given the current Maccarthyite style outing of 'morally wrong' tax avoiders, this and any other method of negotiating CGT will not be allowed by the HMRC no matter how benign.

Surely this must fire you up a bit?

Reassess your true internal rate of return.

I need 10 signatures and lobbyists to begin to fix this.

Thanks

Hamish

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