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UK's £3tn property windfall 'unequal, unearned and untaxed'

United Kingdom, London, Hampstead village. A view down a steep street of 18th Century Georgian terraced houses with sash windows in Hampstead, a suburb in North London. The Royal Free Hospital, the dome of St. Paul's cathedral and downtown London are visible in the distance
Those aged 60 and over have seen the biggest windfalls. Photo: Getty Images (Alex Robinson Photography via Getty Images)

Soaring house price growth in the past two decades has delivered huge capital gains on the homes of the wealthy which are “unearned, unequal and untaxed”, a new report has said. Taxing these could raise £11bn.

Above-inflation house price growth of 86% during the past 20 years has meant capital gains on home owners’ main residences worth £3 trillion, according to research by the Resolution Foundation and Financial Fairness Trust.

This represents a fifth of all wealth in Britain today, the report said, with those aged 60 and over seeing the biggest windfalls – around £80,000 on average, compared to an average of less than £20,000 for those under 40.

The report notes that wealth windfall has been largely untaxed, apart from being unequal and unearned.

This is because primary residences are exempt from capital gains tax (CGT), in contrast to other assets where capital gains attract tax rates of between 10% to 28%.

It argues that extending the scope of CGT to primary residences with a 28% rate on all housing capital gains built up during the past 20 years could raise around £11bn a year, with owners required to pay nothing until they exit home ownership or pass away.

The report said a £75,000 allowance could also be set, which would mean that more than half of estates don’t have to pay any tax, while still raising £4bn a year.

Alternatively, unearned capital gains on a primary residence could no longer be covered by the Inheritance Tax residence nil rate band, raising up to £3bn.

Read more: Christmas-related street names bump up property prices

The Resolution Foundation said continuing to put the burden of higher tax rises almost entirely on jobs and profits, rather than unearned wealth as is currently the case, could drag on people’s wages and incomes.

“Choosing not to tax this huge housing wealth windfall because of the political and administrative challenges involved has real consequences, including higher taxes for workers and businesses,” said Adam Corlett, principal economist at the Resolution Foundation.

“With the government on course to raise taxes by an equivalent of £3,000 for every household in Britain by the middle of the decade, it’s time to reconsider a range of practical options for taxing these unearned windfall gains if we are to protect workers’ living standards in the years ahead.”

The report also said that with rising prices having been driven mostly by falling interest rates, which are now at historic lows, this capital gains boom is likely to represent a one-off windfall.

It also noted that the windfall has not been evenly distributed, benefitting existing home-owners, and particularly those who bought their properties in the late 1990s and early 2000s.

The least wealthiest third of households have gained less than £1,000 per adult on average, compared to an average gain of £174,000 for the wealthiest 10%.

Gains have been largest in London, where on average people have gained £76,000 since 2000, and smallest in the North East of England, with an average gain of £21,000.

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