Labour capital gains tax increases could target entrepreneurs and farmers

Rachel Reeves has set out that 'difficult decisions' need to be made and various reports suggest that serious consideration is being given to aligning capital gains tax (CGT) rates with income tax rates. Some commentators suggest taking this step could raise in the region of £7bn to £8bn for the Exchequer. We dig into the details of how such a move may be implemented and who would be the targets of these additional tax revenues.

In its recent analysis on household wealth, the Resolution Foundation has noted that increasing CGT rates to marginal income tax rates faced by employees, alongside a reintroduction of a relief for inflation, could generate up to £7.5bn in additional tax revenues per annum. This is broadly in line with a previous report from the Guardian on a briefing note suggesting around £8bn could be raised by aligning CGT rates with the income tax rates that apply to dividends.

A rationale for increasing the CGT rate to align with income tax rates is that profits should be taxed the same, regardless of whether they come as a result of work or from investment. As we have seen with the freezing of tax bands and allowances, adjusting for inflation helps ensure a true increase in income or value is taxable. The current CGT system does not adjust for inflation but taxpayers benefit from lower rates of tax when compared to income tax.

The methodology behind the Resolution Foundation’s estimated figures of £7.5bn additional CGT revenues can be found in its previous report in 2023 titled ‘Tax planning’. This highlights a 'complicated pattern of winners and losers'. Its analysis looks at the average level of gain and ownership period by different types of asset class, including unlisted shares, listed shares, residential property and non-residential property.

After taking estimated average levels of inflation into account, and assuming reliefs such as business asset disposal relief are abolished, those with gains from unlisted shares and non-residential property, such as agricultural and commercial property, were amongst those that would be hit hardest. Its model suggests over an 80% net increase in CGT receipts from sales of unlisted shares. In contrast, the estimated tax revenues from sales of listed shares and residential property under the Resolution Foundation’s proposals would actually decrease, due to the adjustment for inflation.

Taxpayers such as entrepreneurs and farmers could be amongst the hardest hit if a policy like this was introduced. However, some may argue that the foundations of these estimated tax revenue figures are built on sand. They do not appear to take into account how taxpayers might change their behaviour in response to significant CGT rate rises.

We have written previously about the options a business owner might consider if CGT rates were raised in line with income tax rates, including structuring deals so potentially no tax is paid or emigrating from the UK. 

If the government aligns CGT rates with income tax rates, it may simply make business owners a moving target. You could end up with a situation where the tax receipts actually decrease, with the Treasury preoccupied with a game of whack-a-mole to try and pin down business owners for the extra tax they think they should pay.