Proposals to increase capital gains tax (CGT) rates to match those of income tax have been put forward by allies of Andy Burnham, a prominent figure within the UK Labour party. This potential shift in fiscal policy has sparked debate regarding its economic implications and fairness.
Louise Haigh MP, described as a close adviser to Burnham, advocated for revising capital gains tax rates in an article for the journal Renewal. She suggested a re-evaluation of Britain's economic thinking, including fiscal rules, with capital gains tax rates being brought closer to income tax levels. Wes Streeting MP, another Labour figure and potential Chancellor, has also voiced support for aligning CGT and income tax, calling it a "wealth tax that works" that could generate an estimated £12 billion annually. Streeting argued that the current system penalizes work and is detrimental to the economy, stating that "a pound made from simply owning assets should not be taxed less than a pound made from a hard day's work."
The disparity between tax rates on profits from assets like shares and property, and income tax rates, has long been a focus for those advocating for increased taxation on wealth. Think tanks such as the Institute for Public Policy Research and the Resolution Foundation have also suggested that tax rates on investment and property profits should be aligned with income tax. The Resolution Foundation's recent report, discussing how the government can reset Britain's economic policy, also recommended an increase in CGT rates.
Capital gains tax applies to profits made from selling assets such as shares, second homes, buy-to-let properties, and personal possessions. Current income tax rates are 20%, 40%, and 45%, while CGT rates stand at 18% for basic rate taxpayers and 24% for higher rate taxpayers, with profits being added to other income to determine the applicable rate. These CGT rates were previously increased by the government in October 2024, from 10% and 20%. Prior to that, the annual CGT-free allowance was reduced from £12,300 to £3,000 by former chancellor Sir Jeremy Hunt.
Aligning CGT with income tax rates could create a more level playing field for income from employment and investment profits. It could also deter business owners and executives from structuring their income through company shares to take advantage of lower tax rates. However, critics argue that such proposals fail to account for the investment and entrepreneurial risks involved.
Indexation and Potential Repercussions
An accompanying argument suggests that if CGT rates are raised, a form of inflation indexation should be reintroduced. This would mean that only gains exceeding inflation would be taxed. Ms. Haigh's article also touched on this, stating that aligning tax rates "should be accompanied by measures, such as inflation indexation, to ensure that genuine investment returns are not unduly penalized." The Resolution Foundation similarly suggested introducing inflation indexation as a "pro-growth reform" that would reduce the disincentive to invest.
Historically, the CGT system has seen changes, including the removal of taper relief and inflation indexation. Some economists warn that significant increases in CGT rates could lead investors to withhold sales, potentially decreasing overall tax revenue. Analysis by the investment platform IG, using HMRC's methodology, suggests that equalizing CGT with income tax rates could lead to a reduction in Treasury revenues of approximately £7.8 billion annually, when taxpayer behavioral responses are considered. Michael Healy, managing director of UK & Ireland at IG, cautioned that higher taxes on investment gains risk discouraging participation in investments, particularly when the UK already has low levels of retail investment among major economies.
Strategies for Investors
In light of potential tax changes, investors with significant asset profits might consider realizing some gains by selling assets or gifting them. Utilizing the current annual £3,000 CGT-free allowance could also be a strategy. However, tax experts advise against acting solely on speculation and emphasize the importance of seeking professional financial advice before making decisions. They also note that if indexation is reintroduced, some long-term investors might benefit even with higher CGT rates.
Tax-efficient strategies include utilizing the tax-free allowances of married couples and civil partners, who can transfer assets between themselves without incurring CGT. Ensuring investments are sheltered, especially with the reduced annual allowance, is also advised. Using tax-efficient wrappers like Individual Savings Accounts (ISAs) and pensions can protect profits and dividends from CGT. The practice of "Bed and Isa," where assets are sold and repurchased within an ISA, is a method many platforms facilitate to move investments into a tax-sheltered environment.