Labour Shelves 'Wealth Tax' Proposal Amid Treasury Warnings

Labour has decided against pursuing a proposed increase in capital gains tax (CGT) after Treasury officials warned the move could backfire and result in significant revenue losses for the government. The proposal, which aimed to raise CGT rates for top taxpayers to match income tax rates, would have nearly doubled the rate from 24 percent to 45 percent.

Supporters of the plan, including some cabinet ministers and union leaders, had argued it was a way to generate substantial revenue by taxing wealthier individuals. However, Treasury officials cautioned that a sharp increase in CGT could lead investors to take measures to avoid the tax, potentially costing the Treasury billions. According to estimates from HM Revenue and Customs (HMRC), a 10-percentage-point increase in the higher rate of CGT could result in an annual revenue loss exceeding £3.5 billion.

Officials also expressed concerns that such a significant rise in CGT could deter investment at a time when the government is seeking to encourage it. One Treasury insider noted that while the idea might seem appealing on the surface, the financial projections did not support its implementation. Another source described the proposal as "bat s**t crazy."

This decision follows a previous adjustment to Labour's plans regarding a Mansion Tax, where the threshold was not lowered as initially considered. Shadow chancellor Andrew Griffith criticized the government's exploration of such tax proposals, stating they could negatively impact economic confidence and employment.

Capital gains tax is levied on profits made from selling assets such as property and shares. Currently, basic rate taxpayers pay 18 percent CGT, while higher rate taxpayers pay 24 percent. Historically, some within the Labour party have argued that taxing wealth less heavily than income is unfair.

However, experts have frequently questioned the potential revenue generation from substantial CGT rate hikes. HMRC has previously warned that very large increases can reduce tax revenue due to changes in taxpayer behavior. Even a modest increase of 5 percentage points in the top CGT rate could potentially cost the Treasury £870 million annually, according to their estimates.

The Chancellor might still consider a smaller adjustment to CGT rates. However, HMRC data suggests that even a 1 percent increase could lead to £30 million in lost revenue. Former Conservative chancellor Sir Jeremy Hunt has previously stated that equalizing CGT with income tax rates was not feasible, as revenue-maximizing rate for CGT is generally considered to be 24 percent, after which revenue may decline.