Why HMRC thinks raising CGT rates could decrease revenues for the Labour government

With less than two months remaining until Labour’s first Budget and widespread speculation about potential increases in capital gains tax (CGT) rates, it might seem straightforward to assume that higher rates would boost HMRC’s revenue. In the 2023/24 tax year, CGT is estimated to have generated less than £14.5bn for the Treasury out of a total of £829bn collected by HMRC, equating to less than 1.75% of tax revenue. 

However, HMRC’s own projections estimate that raising the higher CGT rate by 10 percentage points would actually lead to a £2.025bn decrease in revenue by 2027-28, equating to roughly a 7.5% decrease in CGT revenue over a three-year period. So why does HMRC expect tax receipts to fall in these circumstances? RSM UK submitted a freedom of information request to find out and the response explains HMRC’s calculations and the methodology behind its projected reduction in tax revenues, specifically the expected behavioural impacts.

• HMRC’s calculations begin by estimating the total gains that would be realised if no policy changes were made during the period. This analysis is based on the CGT forecast published by the Office for Budget Responsibility (OBR).
• Its next step is to estimate the CGT yield if rates were increased from 20% to 30%. This assumes a 50% increase in tax yield. At this stage, the model considers only the linear impact of the rate change, without accounting for anticipated behavioural changes.
• The behavioural impacts of a rate increase are then considered, recognising that it is overly simplistic to assume the tax yield without factoring in these effects. HMRC’s calculations assume that a rate increase would lead individuals to reduce the number of gains they realise during the period. This assumption is based on analysis of historical changes to UK CGT rates and the resulting behaviours, using administrative data. It is logical that calculations incorporating behavioural factors would show a lower yield compared to a linear calculation of a CGT rate increase.
• HMRC’s calculations also consider the knock-on impacts on other taxes, firstly income tax (IT). It is expected that IT receipts will increase as taxpayers substitute income for gains. Conversely, the opposite effect is anticipated for Stamp Duty Land Tax (SDLT). The revenue generated from SDLT declines primarily due to the anticipated decrease in individuals making CGT-liable property disposals due to the higher rate.
• These revenue estimations assume the illustrative changes are introduced in April 2025.

Whilst it is clear what HMRC thinks the impact will be if the higher CGT rate is increased by 10%, we do not know what the Treasury’s own modelling looks like. Perhaps unsurprisingly, when a request was made to the Treasury to share details of any modelling undertaken on the impact of higher CGT rates for the most recent tax years, access to this information was denied. It was acknowledged that the Treasury holds such data, implicitly indicating that this has been an option that has been looked at in recent years under the Conservative government. Nevertheless, the data was withheld on the basis that it helps ensure the government has a “safe space” to “consider policy options in private”. Whilst Ms Reeves’ more immediate predecessors in Number 11 have resisted the temptation of raising CGT rates, it remains to be seen whether that was based on data or politics.