Daniel Herring is Researcher for Fiscal and Economic Policy at the Centre Policy Studies.
In just a few days we’ll have a new Prime Minister. And one of the first things he’ll want to do is find more money to spend. He probably can’t borrow much more, so he’ll have to raise taxes. So many in the Labour Party are calling for Andy Burnham to raise capital gains tax (CGT).
It’s important to acknowledge the appeal of the argument. The CGT rate is currently between 18 per cent and 24 per cent , depending on the taxpayer and asset. Why should someone who can classify income as a capital gain pay a much lower rate than someone in employment? Surely, they should pay the same rate of tax?
There are several arguments against. A tax on capital gains can often be double taxation, where a taxpayer first pays tax on their income and then on the gain that income makes. It is economically inefficient and locks in assets which would otherwise be sold. It can also discourage entrepreneurship. Furthermore, constant uncertainty over the rate of CGT hardly inspires confidence.
The Conservatives were constantly tinkering with CGT. In 2010 George Osborne raised the rate from a flat 18 per cent to 18 per cent for basic rate and 28 per cent for higher rate taxpayers. In 2016, this was cut to 10 per cent and 20 per cent . The annual exempt amount was raised from £10,100 in 2010-11 to £12,300, which was then cut by Jeremy Hunt to £6,000 and then £3,000. Hunt also cut the higher residential property rate.
Clearly, chopping and changes hardly inspires confidence and encourages taxpayers to alter the timing of asset sales. The Conservatives were guilty of trying to squeeze revenue out of every possible source, rather than designing a principled CGT that gave investors and businesses certainty.
But the main problem with Labour’s plans is that it will cause economic harm while probably not raising much, if any, money. CGT already does not raise that much money: in 2025-26, it raised £24 billion (2.0 per cent of all government revenue), much less than income tax (£330 billion), National Insurance (£204 billion), and VAT (£182 billion). Raising a few extra billion from CGT is not going to fix the country’s fiscal problems.
And CGT receipts are highly responsive to the rate CGT is paid at, much more so than other taxes. That’s for two reasons. The first is that the sale of assets can be brought forward or delayed. If people think there’s a chance CGT will be lowered in the future, they’ll delay selling. The second reason is that most of CGT is paid by a very small number of people who can easily alter their behaviour.
In 2023-24, 378,000 taxpayers paid, on average, £32,000 each. But just 5,000 taxpayers – less than 2 per cent of those who pay CGT – had gains of over £2 million apiece and accounted for half of the total CGT paid. Just over 10 per cent of those paying CGT (32,000 taxpayers) had gains over £250,000 and accounted for 80 per cent of gains. The obvious point is that losing just a few of these taxpayers would dramatically reduce the revenue from CGT. Currently, the UK sits around the middle of the OECD for its CGT rate. Raising the top rate to 45 per cent (the additional rate of income tax) would make it the highest in the OECD, according to the Tax Foundation.
The end result is that raising CGT might actually lose the government revenue.
Figuring out how much is challenging. A report by the Congressional Research Service in the US estimated that revenue would increase by between 0.22 per cent and 0.9 per cent when the CGT rate rose from 22 per cent to 23 per cent . But starting at a higher rate or increasing it dramatically could have quite different outcomes. HMRC estimates that raising the lower rate of CGT by 1 per cent will raise just £5 million in 2028-29. But raising the higher rate by 1 percentage point will lose £30 million by 2028-29, and raising it by 10 will lose £3.5 billion.
There is a more defensible version that has been promoted by various economists and tax specialists. It proposes aligning the rates with Income Tax but include an allowance for what economists call the ‘normal rate of return’, which is the rate that compensates an investor for a delay in consumption. It’s the return that makes you neutral between investing and spending the money today (practically it would be the rate of inflation plus one or two percentage points).
A 2024 paper by the Centre for Analysis of Taxation makes the case for this, alongside a few other reforms (such as an exit tax, and allowing you to offset capital losses against other income). They estimated that it would raise about £15.7 billion on a static basis, and £9.6 billion on a dynamic basis. For many taxpayers who had seen their assets appreciate slowly, this would actually be much better than the current system.
In principle, this approach is attractive and could move toward greater neutrality. However, care is required. Even the authors acknowledge that changing the assumptions around the responsiveness to the tax change leads to a big change in tax revenue. In the current climate this move is unlikely to help make the UK more competitive.
Essentially, this approach makes the UK even more dependent on fewer taxpayers with very large gains – remember that just 10 per cent account for 80 per cent of revenue currently. Those taxpayers will respond by delaying the sale of assets or leaving, and others will choose not to invest in the UK. Needless to say, introducing a tax change that makes the UK less competitive and loses money would be a disaster. It’s the wrong gamble to make.