Labour’s plans for capital gains tax

Earlier this week Rachel Reeves ruled out introducing any form of wealth tax if the Labour party wins the next general election, insisting she has no plans to increase taxes beyond those already mooted previously. This presumably makes the abolition of the favourable tax treatment for non-UK domiciled individuals who are resident in the UK more of a certainty. However, what has the party specifically said about capital gains tax (CGT)?

In March, the shadow chancellor had ‘no plans’ to increase the rate of CGT, however Labour’s deputy leader Angela Raynor subsequently reopened the debate by suggesting that a commitment to increase CGT rates could be included in Labour’s election manifesto. So where does this leave us? Does the latest denial of plans to increase rates refer to CGT rates or not?

Whilst many reports have read between the lines that CGT will not face an increase in rates in Labour’s election manifesto next year, at no point during the shadow chancellor’s recent interview did she explicitly mention CGT. 

Whilst the denial of a potential wealth tax appears categorical, the statement that there are no plans to increase other taxes appears to provide some potential political wriggle room for manoeuvre. There may be no plans now but there is still plenty of time for plans to change. 

Taxpayers faced with uncertainty over future tax rates will tend to plan for the worst. It remains to be seen whether there will be a further rush to realise gains at what might be a favourable tax rate. An alternative strategy might be to retain assets longer term or reinvest gains in qualifying assets such that any gain is rolled over until a final sale potentially years down the line.

Recent CGT statistics published by HMRC indicate a record £16.7bn of CGT receipts for the 2021/22 tax year. It is unlikely that increases in asset values are the only factor behind these record receipts. Many taxpayers, concerned about potential future increases in CGT rates, may well have cashed out of assets carrying large gains earlier than they might otherwise have, in order to benefit from potentially lower tax liabilities. In particular, they may have been concerned about the aligning of CGT rates with those for income tax, and restrictions in reliefs for business assets, following the suggestions in the 2020 report by the Office for Tax Simplification.

That distortion in taxpayer behaviour may be one of the reasons the shadow chancellor is keen to shut down speculation on potential tax increases. A significant proportion of CGT revenues come from around 1% of CGT taxpayers. As a result, it is difficult to accurately predict how much additional CGT revenues could be generated by increasing the tax rates on capital gains as it could alter taxpayer behaviour accordingly. In short, an increase in CGT receipts does not always follow an increase in rates because the taxpayer can often control whether and/or when gains are realised.

If a significant tax windfall is not guaranteed, the shadow chancellor may be looking to distinguish herself from her opposition by providing clarity to individuals, in particular business owners, for whom CGT can be an emotive issue. Given the uncertainty in recent years surrounding CGT, taking a firm stance in definitively stating it will not be increased is likely to be welcomed by many. As it stands, taxpayers are still waiting for a definitive stance to be taken by any of the major political parties on CGT.