Rising capital gains tax receipts and a public spending mismatch are fueling speculation about the new Labour government’s potential changes to CGT rates.
Some experts suggest that Chancellor Rachel Reeves may consider equalising CGT rates with income tax rates to address the total public finance gap of around £20 billion per year.
As well as shelving major spending projects, speculation is mounting that Reeves will boost the coffers through a raid on capital gains.
Recent data reveals that capital gains tax (CGT) receipts in the UK reached a record high of £16.929 billion in the 2022/2023 tax year. The number of individuals paying CGT has also seen a significant rise, increasing by 50% to 394,000 over the five years leading up to 2021/2022.
The annual tax-free allowance for CGT was substantially reduced from £12,300 in the 2022/23 tax year to £3,000 in the current tax year. This reduction is likely to bring more individuals into the CGT net, potentially leading to even higher receipts in the coming years.
Despite CGT already set to impact more individuals, the government is thought to be planning additional changes to the tax which could result in more people paying more tax.
The government will release more detailed information on Thursday, including breakdowns of the types of gains contributing to this record CGT haul.
“Capital Gains Tax speculation has intensified. As Rachel Reeves peers into the hole in the public finances and is set to reveal just how deep it goes, rumours are swirling as to whether CGT changes could be used to generate extra cash to help fill it,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
“One of the suggestions doing the rounds is that capital gains tax rates could rise to match income tax. It was one of the things the Office for Tax Simplification explored in 2020. This would see a shocking hike for UK investors.
“As the OTS highlighted in 2020, in the long term it runs the risk of people hoarding their profits until they die. This would mean, for example, buy-to-let investors refusing to part with properties they don’t really want in an effort to avoid CGT, while first time buyers struggle to get on to the property ladder.
“The tax system should be encouraging and rewarding long-term investing. This has been absent from the CGT system since taper relief was abolished in April 2008. Right now, investors face the double-whammy of a system that taxes investments that are simply keeping pace with inflation and allows for far lower gains to be realised tax-free each year. If the rates do end up rising, it would add insult to injury. We’d urge the Chancellor to reintroduce incentives that reward long-term investing.”