Speculation is growing that Rachel Reeves may raise capital gains tax (CGT) rates to match income tax as a measure to address the public finance deficit. This comes as CGT receipts hit a record £16.929bn for the 2022/2023 tax year, a fourfold increase over the past decade. Detailed breakdowns of these gains will be released by HMRC on Thursday.
The number of people paying CGT has risen by 50% to 394,000 over the five years to 2021/2022. This upward trend is likely to continue following the reduction of the annual tax-free allowance from £12,300 in 2022/23 to £3,000 in the current tax year.
Sarah Coles, head of personal finance at Hargreaves Lansdown, commented on the speculation: “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.
“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.”
