The dissapearing property ladder

westernpromise

Physics wrote: »

But I'm clearly not reinvesting that £10. I'm keeping it.

I know. You're making my argument for me.

MFW's argument was that there should be CGT on what he considers the 'profit' - in reality, the inflation - on the sale of one's main home. I am pointing out that as soon as one tried to buy the same thing again, which you'd have to when it's your main home we're talking about, one would find that it was, in fact, inflation.

If you tax away 30% (for example) of somebody's inflationary 'profit', then what he's left with is £7 in cash. If he adds this to the £50 he previously borrowed then he can now afford only 95 Mars bars at 60p. It's a funny kind of profit that leaves you worse off.

HMRC already - iniquitously - taxes inflation (after Lawson pretty much stopped it) but just because they've started there's no reason to encourage them.

Physics

westernpromise wrote: »

HMRC already - iniquitously - taxes inflation (after Lawson pretty much stopped it) but just because they've started there's no reason to encourage them.

I had no idea HMRC paid such attention to my posts. I'll be more careful in future.

America, incidentally, does not have this quirk of CGT exclusion on main homes. I believe people still move house there, but I've never visited, so I can't say for certain.

MFW_ASAP

westernpromise wrote: »

It's a good, intuitive way to explain the concept of inflation and capital gain not being the same.

If it were possible to sell 100 Mars bars for £60 then but 100 back for £50, that would be a gain. Anything else is inflation.

Nah, it's a poor way to explain the concept of inflation (at least the way you're doing it is). Lets me try:

If you manufactured 100 mars bars and the production costs (labour/ingredients/wrapping/boxes) and logistic costs (delivery costs) were £40 but you sold them for £50, then you made a £10 profit that would be subject to taxation.

If you manufactured 100 mars bars and the production costs rose because there was a global sugar cane blight that pushed up the cost of refined sugar, making the costs £45 but you sold them for £50, then you made a £5 profit that would be subject to taxation.

As we can see, the £5 inflationary cost was not included in the taxation...

IveSeenTheLight

westernpromise wrote: »

That's the wrong comparison though. Physics' argument was that starting from borrowing £50 to buy 100 Mars bars, a rise in the price of a Mars bar from 50p to 60p constituted a profit.

I have shown, I suggest, that it's not. In his own example, he's gone from having a £50 net debt and 100 Mars bars to £50 of net debt (expressed as £10 - £60) and 100 Mars bars. So given this, what I want to know is, does he still expect to be taxed on the first part of that term, his £10, as though it were profit?

Clearly the answer to this has to be No.

You would appear to be (deliberately or not) ignoring the asset value.

Essentially you are saying he has £50 nett debt but £60 of assets

westernpromise

MFW_ASAP wrote: »

You seem to confuse discussions by introducing similies such as BTL and Mars bars when you could just talk about homes.

It's a useful analogy to explain why inflation is not profitable. Nobody would consider they'd made a profit from selling something at what it costs to replace it, whether that's a Mars bar or a house.

Your logic seems to state that just because CGT is liable, no one will sell houses.

Almost nobody will sell main residences because your proposed tax would make it impossible to replace it with a property of identical value. The inflation will be taken away and will leave you short of money.

This is obviously not the case with BTL or other commercial properties, as people often sell their properties, cashing in on the gains regardless of the fact they are taxed on some part of it.

That's because they're commercial properties. You are proposing to treat main homes like commercial properties, which is lunacy. If I book a holiday for £1000 and before I set off its price increases to £1200 have I made a profit? Should I pay tax on the inflation? Why stop at houses? If I buy my annual train season ticket on December 31 for £1,000 and on January 1 it goes up to £1,050 should I pay CGT on my profit?

Besides, not everyone will be able to afford to keep every house they have ever bought, many would not want to - not everyone wants to be a landlord.

Agreed, but how many will it take to distort the market?

One way in which existing tax structures distort the market is that the stamp duty on a £1 million property is £44k whereas the stamp duty on 5 x £200k properties is £7.5k. This goes a long way to explaining why BTL landlords buy FTB properties. You're proposing yet another distortion that will tend to create more landlords, which I thought you opposed.

Nice talking to you by the way. It's all very civil. Makes a change...

westernpromise

Physics wrote: »

I had no idea HMRC paid such attention to my posts. I'll be more careful in future.

America, incidentally, does not have this quirk of CGT exclusion on main homes. I believe people still move house there, but I've never visited, so I can't say for certain.

That's because you get income tax relief on your mortgage. You get a tax benefit offset by a tax liability which kicks in only above a gain of $250k, i.e. the first $250k of purely inflationary gain is ignored.

westernpromise

MFW_ASAP wrote: »

Nah, it's a poor way to explain the concept of inflation (at least the way you're doing it is). Lets me try:

If you manufactured 100 mars bars and the production costs (labour/ingredients/wrapping/boxes) and logistic costs (delivery costs) were £40 but you sold them for £50, then you made a £10 profit that would be subject to taxation.

If you manufactured 100 mars bars and the production costs rose because there was a global sugar cane blight that pushed up the cost of refined sugar, making the costs £45 but you sold them for £50, then you made a £5 profit that would be subject to taxation.

As we can see, the £5 inflationary cost was not included in the taxation...

Which doesn't work because we're not talking about manufacturing margin, but stock appreciation.

The finished article's price has inflated to 60p, so if you bought one at 50p, you're ahead if you don't need the article (which is the BTL position). We're talking about taxing the main home, so you do need to replace the article. When you do, the cost of replacing the 60p Mars bar is, er, 60p.

If someone took away some of your 10p 'profit', you'd now be unable to afford a replacement Mars bar. This alone should tell you that what you're being taxed on is inflation, not profit.

If you sold your Mars bar for 65p and were able to replace it at 60p, then your extra 5p over replacement cost is capital gain.

MFW_ASAP

westernpromise wrote: »

. If I book a holiday for £1000 and before I set off its price increases to £1200 have I made a profit? Should I pay tax on the inflation? Why stop at houses? If I buy my annual train season ticket on December 31 for £1,000 and on January 1 it goes up to £1,050 should I pay CGT on my profit?

But you haven't made a profit, you've made a saving. You're the buyer, not the seller.

If the holiday company offered a holiday at £1000 that cost it £800, then it makes a £200 profit. If it then increases its prices to £1200 without any corresponding increase to its costs, then it's made a £400 profit.

It is taxed on the profit, nothing else.

westernpromise

IveSeenTheLight wrote: »

You would appear to be (deliberately or not) ignoring the asset value.

Essentially you are saying he has £50 nett debt but £60 of assets

He's got the same actual assets as before - 100 Mars bars. they could have a notional value of £1000 but he can't ever realise it. As soon as he sells for £1000 he has to pay that to replace them.

westernpromise

MFW_ASAP wrote: »

But you haven't made a profit, you've made a saving. You're the buyer, not the seller.

If the holiday company offered a holiday at £1000 that cost it £800, then it makes a £200 profit. If it then increases its prices to £1200 without any corresponding increase to its costs, then it's made a £400 profit.

It is taxed on the profit, nothing else.

I'm the buyer and seller of the house too. I buy the house for X, I later sell it for X+. A replacement house costs me X+. Where's the profit?

You can't sell holidays on (yet) but what would be the difference? I bought a holiday for £1000 and it appreciated to £1200. I enjoyed a capital gain compared to those who bought later, even though if I'd cancelled and rebooked I'd pay what they did.