I have seen reports suggesting capital gains tax could be increased significantly, bringing it into line with income tax rates.
How likely is this if Andy Burnham were to become Prime Minister, and have capital gains tax rates not already been raised recently?
Why does this idea keep coming up when some analysis suggests that a sharp rise in capital gains tax might actually reduce the amount of money the Treasury collects?
Simon Lambert, of This is Money, replies: The debate over higher capital gains tax rates has returned to the spotlight after Louise Haigh MP, a close adviser to Andy Burnham, argued that the system should be revisited.
Writing in an article for the journal Renewal, titled Rebuilding the UK tax system, Ms Haigh called for a broader rethink of Britain’s economic approach, including a fresh assessment of fiscal rules. As part of that, she said capital gains tax rates “should be brought closer to income tax rates”.
She is not the only senior Labour figure to make the case. Wes Streeting, who has been discussed as a possible Chancellor if Rachel Reeves were to leave the role, has also argued for aligning CGT with income tax. Setting out the idea last month, he described it as a “wealth tax that works” and claimed it could raise £12billion a year.
Speaking to the BBC, Mr Streeting said: “The system is penalising work. It’s not fair and it’s bad for our economy. We need a wealth tax that works. A pound made from simply owning assets should not be taxed less than a pound made from a hard day’s work.”
Louise Haigh, pictured left in sunglasses, has become a key ally of Andy Burnham, centre, and has argued in favour of raising capital gains tax
The gap between the tax on profits from assets, such as shares and property, and income has long been a target for those arguing for more taxes on wealth.
Campaigners, such as think-tank the Institute for Public Policy Research, say that tax rates on investment and property profits should be level with income tax.
The Resolution Foundation also suggested that CGT rates should rise in a recent report outlining ‘how the Government can reset Britain’s economic policy following disastrous local election results’.
Capital gains tax is levied on profits from assets ranging from shares to second homes, buy-to-let properties and personal possessions.
Currently income tax rates stand at 20 per cent, 40 per cent and 45 per cent, while CGT rates are 18 per cent for basic rate taxpayers and 24 per cent for higher rate taxpayers. Profits are added to your other income to decide the rate paid.
The rates of CGT were hiked by Rachel Reeves in her October 2024 Budget, from 10 per cent and 20 per cent, respectively. Before this former chancellor Sir Jeremy Hunt had slashed the annual capital gains tax-free allowance from £12,300 to just £3,000.
This would create a level playing field in how income from employment and profits from investments are treated. It would also prevent business owners and executives from taking some of their income via company shares to benefit from lower tax rates.
But plans to equalise CGT and income tax rates have been criticised as not recognising the investment or entrepreneurial risk being taken.
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Should CGT be hiked but inflation indexation return?
There is also a strong argument that if CGT rates were raised, a form of indexation should be brought back into the system, which would mean only gains above inflation are taxed.
In fact, this is something that Ms Haigh suggested in her Renewal article, stating that aligning the tax rates ‘should be accompanied by measures, such as inflation indexation, to ensure that genuine investment returns are not unduly penalised’.
Last month, think-tank the Resolution Foundation urged Labour to reset its economic policy and called for CGT rates to rise towards dividend and income tax levels. However, it added that inflation indexation should be introduced ‘so that only real returns are taxed, which would substantially reduce the disincentive to invest and amount to a pro-growth reform’.
Adding an element of indexation would return the CGT system to being more like the one that existed before Alistair Darling scrapped taper relief and introduced a low flat rate of 18 per cent.
Prior to that CGT was charged at the same rate as income tax but taper relief, introduced by Gordon Brown in 1998, reduced the rate for long-term asset ownership. Mr Brown’s move took away the inflation indexation that had been introduced by Nigel Lawson in the 1980s.
Introducing indexation alongside a rise in CGT rates could be an essential move to prevent the tax hike backfiring and bringing in less money. Previous evidence and modelling by economists indicate that big rises in capital gains tax rates can lead investors to avoid selling and lower the tax take.
Investment platform IG says that analysis using HMRC’s own published methodology suggests once taxpayer behavioural responses were taken into account, equalising CGT with income tax rates could reduce Treasury revenues by approximately £7.8billion annually.
Michael Healy, managing director of UK & Ireland at IG, said: ‘At a time when we need more people investing and building long-term financial resilience, making investment gains significantly more heavily taxed risks discouraging participation.
‘The UK already has some of the lowest levels of retail investment among major developed economies and we should be looking for ways to increase engagement, not reduce it’
How to protect against a CGT hike
Investors who have made substantial profits on shares or property could consider crystallising some gains, which is done by selling up or giving assets away.
Any unused portions of this tax year’s £3,000 CGT-free allowance could be used, with current capital gains tax rates incurred above that.
However, tax experts and financial planners warn that decisions to sell for tax purposes should be carefully considered and professional advice sought.
They also advise that people should not act based on speculation. It’s also worth bearing in mind that if indexation was re-introduced, some long-term investors could end up benefitting despite CGT rates rising.
Married couples and civil partners can pass assets to each other free of CGT, which enables them to make use of both their tax-free allowances and can also be beneficial if one partner pays a lower tax rate.
As a general point it is always worth trying to make sure as much of your investments as possible are sheltered from capital gains tax, particularly with the annual tax-free allowance now set at just £3,000.
Long-term investors and those who have built up substantial holdings in company share schemes can often fall victim to large CGT bills that could have been avoided with earlier action to shift assets into an Isa or pension.
The recent CGT raids on investment profits highlight the importance of using the tax-friendly shelter of a stocks and shares Isa wherever possible. Profits and dividends within an Isa are tax-free. CGT rules prevent investors from selling shares to crystallise a gain and then buying the same stock back within 30 days.
However, there is an exemption that allows assets to be sold and bought back immediately with an Isa. This is known as a Bed and Isa and most investment platforms will carry it out for customers.
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