Capital gains tax (GGT) was introduced in 1965 under Harold Wilson’s Labour government. Most gains were taxed at 30 per cent while the standard income tax rate was 41 per cent.
Since then the tax has been reformed many times: up, down, flat rate, tapered rate, and back to a two-tier system.
CGT is paid on the profit from the sale of a range of assets: from shares to second homes. Basic-rate taxpayers pay 10 per cent on gains from most assets but 18 per cent on gains from property. Higher and additional-rate taxpayers pay 20 per cent on most assets and 24 per cent on property. The tax is only paid on amounts above the annual CGT allowance of £3,000.
The focus on CGT sharpened after Sir Keir Starmer gave a speech warning of what we can expect in October’s budget, and it is easy to see why: on paper, raising CGT looks like a no-brainer.
Fewer than 3 per cent of adults paid CGT in the ten years to 2020, according to research by the University of Warwick and the London School of Economics and Political Science. It is also one of the few taxes that the new government has not pledged to leave untouched.
There is a moral argument about equalising CGT with income tax too. Why should someone deriving an income from shares pay less tax than someone making a living from going to work?
But as valid as these arguments may seem, it still doesn’t make sense to raise the tax.
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The Office for Budget Responsibility expects CGT to raise £15.2 billion for the Treasury this tax year. But it would be naive to think that doubling the tax would double this revenue.
HMRC’s own ready reckoner is admitting as much. It suggests that a 10 percentage point increase in the higher rate of CGT could lead to a £400 million fall in the tax take in 2025-26, followed by a £985 million drop in 2026-27, and £2 billion in the year after.
This is because people’s behaviour will change if the tax increases. There is not much choice when it comes to paying income tax — for most people, this is done automatically by your employer. But you rarely have to sell an asset, which means that for many people, CGT is not a tax that they absolutely have to pay — you can just wait out your asset sale in the hope that rates will come down, like they have in the past.
You also don’t pay CGT on death. Many rich people, who don’t need to sell, might simply end up leaving their assets when they die. Raising CGT rates would make this “forgiveness on death” loophole even more valuable.
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It is worth remembering that we have been here before. When George Osborne raised CGT from 18 per cent to 28 per cent, less revenue was made and there were calls for him to lower it again.
Rumours about a pending rise have already had an impact. Nimesh Shah from the accountancy firm Blick Rothenberg tells me he has seen a significant increase in queries in the past couple of days. There have also been a number of business owners taking more dramatic steps to exit the UK to avoid the tax completely. But rash decisions are often not the right ones to take — for the individual, or the economy.
The argument that those with the broadest shoulders should carry the biggest burden is a noble one, and most of those paying CGT are wealthy. But Rachel Reeves is not here to solve equality. She’s the chancellor here to plug the £22 billion fiscal hole. Raising CGT will not help with that.
@JohannaMNoble