Nothing is certain but death and taxes

June 7, 2010

-Rachel Mason is public relations manager at Fair Investment Company. The opinions expressed are her own.-

If there is one thing in this life you can be sure about it is that you are going to be taxed a lot. You can’t escape it.
You are taxed on your income, then you are taxed on the money from your income that you have already been taxed on when it becomes savings, then you are taxed on your pension, which is made up of cash that you have already been taxed on, and then there’s road tax, car tax, council tax, VAT, stamp duty….the list goes on.

And then of course, just when you thought you couldn’t be taxed anymore, you get taxed on any profit you make when you sell any assets – assets bought with money that’s already been taxed! I am talking of course about the tax that’s the talk of the moment – capital gains tax.

The new coalition government is planning to increase capital gains tax from its current rate of 18 per cent to 40 per cent or possibly even 50 per cent, a move that aims to stop ‘fat cats’ from taking their income as capital gains (the 18 per cent capital gains tax rate is lower than their 40 percent income tax rate) and that is all very well, apart from the fact that it is going to hit millions more, the vast majority of whom are certainly not fat cats.

Those due to be hit hardest are second home owners, landlords, and sadly, older people in care homes. According to a report in the Telegraph this week, any person who moves into a nursing home but continues to own their former family home could be liable to pay capital gains.

This is because, after three years of living in care, the nursing home is deemed the person’s primary residence and their former home is designated as a “second property”. This means that if the person is then forced to sell their home, for example, to pay for their care home fees, they will be liable to pay capital gains if their home has increased in value.

Is this fair? Well, no, it’s not. We already live in a society where people are being encouraged to save and then hit when they do, and now we have a situation where old people, many of whom have worked all their lives to own their own home are being taxed for this hard work simply because they cannot look after themselves anymore.

Of course if they sold the home straight away they wouldn’t be liable, but it doesn’t usually work like that. Many old people may not be sure of how long they are going to be in care – they may become ill, need care, recover and want to move back home.

Others may be reluctant to sell their home straight away –they may be in denial that they can no longer cope, or simply want to hold onto it because of the memories it holds; either way, they cannot be expected to make a rash decision like selling their family home, on the basis that they have to beat some tax deadline.

And then of course, there’s the fact that when the gains on these properties are taxed, unless indexation is brought back in (taking inflation into account – Darling scrapped it when he moved capital gains tax down to 18 per cent two years ago) much of the ‘gains’ being taxed are not actually gains, but the result of inflation, which makes the system even more unfair.

If, for example, you bought your home in 1980 for 25,000 pounds, and it’s now worth say 200,000 pounds, 55,000 pounds of that increase is down to inflation alone, so the real capital gains are 120,000 pounds but capital gains will be due on the 175,000 pound ‘gain’.

I think this tax rise has good intentions, but it is going to hit more people than just those big earners it is aiming to catch out. They will find another loophole, and continue to be fat cats, but sadly, as Mike Warburton, senior tax partner at Grant Thornton, rightly points out, the reality is simply “another example of capital gains tax hitting a group of people through no fault of their own.”

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