Falling stock markets and property prices are set to deal a more than £5billion hit to public finances in another setback for Jeremy Hunt in his drive to fill the £50billion hole in public finances.
Exchequer revenue from capital gains tax (CGT) is expected to be dragged down by falling investment values and volatility prompting many to delay the sale.
The fall in stocks is expected to result in more than £3.5billion of revenue declines, while nearly £2billion is expected to be lost due to falling property prices next year, according to EY Item Club.
CGT is levied on profits made on the sale of an investment that has increased in value, including stocks and properties that are not the principal residence. The CGT revenue generated for the Treasury depends on the value of the investments and the asset holders’ choice to sell, which triggers the tax.
Martin Beck, chief economic adviser at EY Item Club, said the fall in the FTSE All-Share index this year suggested £3.6bn in lost CGT revenue, based on official revenue guidelines tax.
CGT revenue from real estate will be boosted this year by soaring house prices, but forecasts of an 8% drop in prices from peak to trough in the coming years would mean a hit. just under £2 billion.
The housing market is beginning to suffer as rising interest rates and market borrowing prices drive up the cost of mortgages. Stock markets were rocked by fears of recession and rising interest rates.
Thomas Pugh, a British economist at accounting firm RSM, said a rush to exit by homeowners under pressure could help soften the blow to the Treasury from falling house prices.
“The impact of falling house prices could be partly offset by small owners leaving the sector and selling homes they bought long ago at a substantial profit, even if prices drop a bit over the next couple of years,” he said.
Mr Pugh added that the revenue generated by CGT is “strongly influenced by behavioral changes, which are often not easy to predict”.
The Office for Budget Responsibility expects the government to generate £15bn from CGT in 2022/23. The watchdog expected revenue from the tax to rise to £21bn by 2026/27, but these estimates are highly sensitive to market movements.
The chancellor could target the CGT as part of his efforts to generate more tax revenue during the fall declaration. Treasury insiders said Mr Hunt had considered changing CGT relief, allowances and even the headline rate.