With all the major political party manifestos published, it seems the absence of content from these election pledges is now a major focus. In particular, Labour are facing questions on whether their manifesto plans will generate sufficient finances to deliver genuine change to the country.
Keir Starmer has already ruled out increases to the basic, higher or additional rates of income tax, NICs, VAT and corporation tax. That restricts the party’s ability to raise tax revenues that might be needed throughout the next parliament if they are elected, with the four biggest-hitting taxes benched.
Such a wide-ranging veto on tax rises leaves very little room for a future chancellor to manoeuvre and naturally leads to speculation that CGT rates should be reviewed. Both the Liberal Democrats and the Green party suggest a significant reform of CGT including higher rates, whilst the Conservatives rule out such an increase – but Labour remains silent on the matter.
Whilst the Labour manifesto promises to close a CGT ‘loophole’ which allows the private equity industry to pay CGT rates on ‘performance-related pay’, it is not clear if other tweaks could be made to the CGT regime in future, such as amending the scope of reliefs or changing CGT rates or bands. Keir Starmer has recently confirmed that Labour would not impose CGT on the sale of a person’s primary residence, following speculation in the press.
A common rationale for increasing rates is that CGT is a tax for the wealthy, as research shows it was paid by fewer than 3% of UK adults between 2011 and 2020, and it would be fairer to tax capital gains at the same rate as income tax. Whilst that cuts to the heart of the issue for many, there are more nuanced reasons why the UK and many other countries have such a big difference between their income tax and CGT rates.
One reason is that capital gains are often ‘bunched’ together into a lump sum that is taxed in a single year. An equivalent amount of income might be spread across a number of years, and subject to a lower amount of tax as a result. That might be particularly true for business owners who reinvest into their business to grow it and do not take much of an income each year as a result. If the income tax and CGT rates were the same, a business owner who did extract income each year could be better off than someone who later retired and received a lump sum on a sale of the business.
On the face of it, that might seem like a niche problem but a large amount of CGT revenues is driven by the sales of businesses. It is also a point that Rachel Reeves is clearly alive to, as stated in an interview with BBC Radio 4’s Today programme in March 2023:
‘I don’t have any plans to increase capital gains tax. There are people who have built up their own businesses who maybe at retirement want to sell that business. They may not have had huge income through their life if they’ve reinvested in their business, but this is their retirement pot of money.’
It is not just a question of fairness however but what the resulting impact might be on CGT revenues if CGT rates were increased in line with income tax rates. In the year to 5 April 2024, CGT is estimated to have generated over £15bn for the Treasury, but it is too simplistic to suggest that doubling the main rate of CGT from 20% to 40% would generate an extra £15bn. Indeed, HMRC’s latest estimates suggest a 10% increase in the higher CGT rate would reduce the Treasury’s tax receipts by over £2bn in the 2027/28 tax year.
Latest statistics highlight 45% of CGT revenues come from large disposals generating gains of £5m or more. Introducing a 40% or 45% rate of CGT would undoubtedly distort taxpayer behaviour in relation to these larger disposals, potentially draining the Treasury of much needed funds.
There is an obvious route that some business owners might explore to mitigate such a tax liability. In the UK, where certain conditions are met, the Substantial Shareholding Exemption (SSE) applies to companies selling shares in other companies, which, very broadly, effectively results in no tax being paid by the company on the disposal of the shares. Why trigger a tax liability at 45% personally when a transaction could potentially be structured so none is paid at all by a company instead? It’s worth noting that a tax charge may arise on the subsequent extraction of sales proceeds from that company, although there may be tax-efficient ways of extracting the proceeds.
Scrapping SSE is not a straightforward solution to that either, with economic research highlighting how increasing tax rates on share disposals by companies directly correlates with a reduction in acquisition activity. Looking at other countries in Europe, Denmark broadly taxes individual capital gains like income but has a similar regime to the UK for company capital gains which may help ensure its mergers and acquisitions activity is not adversely impacted.
Whilst the UK may be an island, the approach of other countries in relation to CGT cannot simply be ignored. A CGT rate of 45% would be one of the highest in the world and nearly every country in Europe could inadvertently become a more attractive place than the UK to crystallise gains. It is little wonder that a CGT rate rise does not appear in the Conservative and Labour manifestos and there are good reasons why they may be keen for that to remain the case.
With all the major political party manifestos published, it seems the absence of content from these election pledges is now a major focus. In particular, Labour are facing questions on whether their manifesto plans will generate sufficient finances to deliver genuine change to the country.
Keir Starmer has already ruled out increases to the basic, higher or additional rates of income tax, NICs, VAT and corporation tax. That restricts the party’s ability to raise tax revenues that might be needed throughout the next parliament if they are elected, with the four biggest-hitting taxes benched.
Such a wide-ranging veto on tax rises leaves very little room for a future chancellor to manoeuvre and naturally leads to speculation that CGT rates should be reviewed. Both the Liberal Democrats and the Green party suggest a significant reform of CGT including higher rates, whilst the Conservatives rule out such an increase – but Labour remains silent on the matter.
Whilst the Labour manifesto promises to close a CGT ‘loophole’ which allows the private equity industry to pay CGT rates on ‘performance-related pay’, it is not clear if other tweaks could be made to the CGT regime in future, such as amending the scope of reliefs or changing CGT rates or bands. Keir Starmer has recently confirmed that Labour would not impose CGT on the sale of a person’s primary residence, following speculation in the press.
A common rationale for increasing rates is that CGT is a tax for the wealthy, as research shows it was paid by fewer than 3% of UK adults between 2011 and 2020, and it would be fairer to tax capital gains at the same rate as income tax. Whilst that cuts to the heart of the issue for many, there are more nuanced reasons why the UK and many other countries have such a big difference between their income tax and CGT rates.
One reason is that capital gains are often ‘bunched’ together into a lump sum that is taxed in a single year. An equivalent amount of income might be spread across a number of years, and subject to a lower amount of tax as a result. That might be particularly true for business owners who reinvest into their business to grow it and do not take much of an income each year as a result. If the income tax and CGT rates were the same, a business owner who did extract income each year could be better off than someone who later retired and received a lump sum on a sale of the business.
On the face of it, that might seem like a niche problem but a large amount of CGT revenues is driven by the sales of businesses. It is also a point that Rachel Reeves is clearly alive to, as stated in an interview with BBC Radio 4’s Today programme in March 2023:
‘I don’t have any plans to increase capital gains tax. There are people who have built up their own businesses who maybe at retirement want to sell that business. They may not have had huge income through their life if they’ve reinvested in their business, but this is their retirement pot of money.’
It is not just a question of fairness however but what the resulting impact might be on CGT revenues if CGT rates were increased in line with income tax rates. In the year to 5 April 2024, CGT is estimated to have generated over £15bn for the Treasury, but it is too simplistic to suggest that doubling the main rate of CGT from 20% to 40% would generate an extra £15bn. Indeed, HMRC’s latest estimates suggest a 10% increase in the higher CGT rate would reduce the Treasury’s tax receipts by over £2bn in the 2027/28 tax year.
Latest statistics highlight 45% of CGT revenues come from large disposals generating gains of £5m or more. Introducing a 40% or 45% rate of CGT would undoubtedly distort taxpayer behaviour in relation to these larger disposals, potentially draining the Treasury of much needed funds.
There is an obvious route that some business owners might explore to mitigate such a tax liability. In the UK, where certain conditions are met, the Substantial Shareholding Exemption (SSE) applies to companies selling shares in other companies, which, very broadly, effectively results in no tax being paid by the company on the disposal of the shares. Why trigger a tax liability at 45% personally when a transaction could potentially be structured so none is paid at all by a company instead? It’s worth noting that a tax charge may arise on the subsequent extraction of sales proceeds from that company, although there may be tax-efficient ways of extracting the proceeds.
Scrapping SSE is not a straightforward solution to that either, with economic research highlighting how increasing tax rates on share disposals by companies directly correlates with a reduction in acquisition activity. Looking at other countries in Europe, Denmark broadly taxes individual capital gains like income but has a similar regime to the UK for company capital gains which may help ensure its mergers and acquisitions activity is not adversely impacted.
Whilst the UK may be an island, the approach of other countries in relation to CGT cannot simply be ignored. A CGT rate of 45% would be one of the highest in the world and nearly every country in Europe could inadvertently become a more attractive place than the UK to crystallise gains. It is little wonder that a CGT rate rise does not appear in the Conservative and Labour manifestos and there are good reasons why they may be keen for that to remain the case.
