Chancellor faces £5bn blow to UK finances

THE slump in stock markets and house prices is set to deal a £5bn-plus blow to public finances in another setback for Jeremy Hunt in his drive to fill the £50bn hole in the government’s budget.

The Exchequer’s revenue from capital gains tax (CGT) is expected to be dragged down by the plunging value of investments and volatility tempting many to hold off selling.

The slide in stocks is expected to cause a revenue hit of more than £3.5bn while almost £2bn is set to be lost from falling house prices next year, according to EY Item Club.

CGT is levied on profits made from selling an investment that increased in value, including shares and properties that are not the main home. The CGT revenue generated for the Treasury depends on the value of investments and whether the holders of assets choose to sell, which triggers the tax.

Martin Beck, chief economic adviser at EY Item Club, said that the fall in the FTSE All-Share Index this year suggested £3.6bn in lost CGT revenue, based on official tax revenue guidelines.

CGT revenue from property will be boosted this year by the surge in house prices but predictions of a peak-to-trough 8pc fall in prices in the coming years would mean a hit of just under £2bn. The housing market is beginning to suffer as rising interest rates and market borrowing prices push up the cost of mortgage borrowing. Stock markets have been rattled by recession fears and higher interest rates.

Thomas Pugh, economist at accounting firm RSM, said a rush to the exit by under-pressure landlords could help soften the blow dealt to the Treasury.