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Chancellor delivers ‘Osborneomics’

ONE of my favourite books is Alice in Wonderland. I think it must be George Osborne’s favourite too. That’s the only way to make any sense out of what he does. Earlier this year in his quest for tax simplification, he simplified income tax so we now tax interest differently from other income (but call it savings income albeit that most people would attach that label more readily to dividends rather than interest) and tax dividends differently again. Far simpler than the old way of adding all of a person’s income together and taxing the total.

He has now turned his hand to simplifying capital gains tax. From 2019, the tax on the sale of residential property will be payable within 30 days of completion. So back to those weird avoidance schemes where you don’t complete for 100 years. What if you have CGT losses available? Will you be able to deduct these in calculating the payment on account? There will be an exclusion for homes qualifying for principal private residence. That will be fun as it is becoming increasingly difficult to identify which do so.

The problem of course is that Osborne’s housing policy would make Lewis Carroll proud. He realises that most newly-weds cannot buy houses because they are in competition with buy-to-let landlords and the tax system gives landlords a huge advantage because it lets them borrow most of the funds and pay the interest out of pre-tax income but forces the newly-weds to pay their mortgage interest out of post-tax income. The obvious solution would be either to give a tax deduction to first-time buyers for mortgage interest or to deny landlords relief for interest payments so creating a level playing field.

After all, rental property is nowadays the only investment that attracts tax relief on borrowings. Instead we have had a cut in the rate of relief for mortgage interest for landlords – but not yet of course and not so as to cause too much pain – and now an extra pinprick of 3% extra SDLT on the purchase from 1 April 2016 of additional residential properties costing over £40,000, such as let properties and second homes from 1 April 2016. I suppose it’s some sort of an achievement to manage to upset the investors without really helping the kids.

Adding 3% to the cost of a property is unlikely to deter either landlords or those wicked foreigners from buying UK property. It will be interesting to see how it works. If I buy a house for my daughter, a not uncommon transaction, is that my second home or her first? Is it different if I lend her the money and she buys it? What is she finds it is too far away from her child’s school and moves out and lets the property instead? Will she have to pay the extra tax at that stage? The problem with these gimmicky things is that the legislation they need to make them work is completely disproportionate to the tiny bits of extra tax that they raise.

Still all this simplification justifies HMRC’s £1.3bn investment to become one of the most digitally advanced tax administrators in the world. It is fast becoming impossible for anyone to understand how their tax bill is arrived at but Uncle HMRC will tell them and, as he always gets things right, there is no need to worry about how he calculates it. Becoming so digitally advanced does of course mean that we will have to update our tax accounts quarterly in future instead of doing only one tax return a year, but forcing taxpayers to do four times more work is a small price to pay for modernising HMRC in George’s world. So is his proposal that no-one will be able to set up a new business or buy a rental property unless they have the digital skills to deal with HMRC electronically.

Another first? The UK is now the first country to actually encourage people into the shadow economy. Apparently this digital advancement means that 60% of those who currently phone HMRC will no longer need to do so – or, perhaps, if HMRC cut their call centre staff to reflect this target – will no longer be able to get through. All this extra work is apparently going to reduce the cost to businesses of tax administration by £400m.

Some years ago I gave Gordon Brown the accolade of being the worst chancellor of my career. George seems determined even to take that award for himself.

Robert Maas is a tax partner at Carter Backer Winter

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