How £2bn could be lost from the London economy

By Elspeth Pridham
December 9, 2020

Real estate investment firm London Central Portfolio (LCP) has warned that a rise in Capital Gains Tax could result in almost £2bn being wiped from the London economy.

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. The OTS report anticipates that this could bring an additional £14bn into the Exchequer and would include increasing the tax on the sale of all properties which are not the main home.

However, the OTS also raises concerns that “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 Capital Gains Tax has a ‘lock in’ effect.”

Andrew Weir, CEO of London Central Portfolio, comments “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. 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. 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.”