The Office for Budget Responsibility (OBR) has slashed its Capital Gains Tax (CGT) revenue forecast by £23bn by 2030, despite the hike in tax rates in the Autumn Budget and reductions to the relief on offer under the Business Asset Disposal Relief (BADR) rules.
According to the OBR, Capital Gains Tax is forecast to raise £13.3bn this tax year – equal to 0.5% of GDP – which is 8.5% lower than receipts for 2023-24.
A rush to cash in gains before the October Budget means that receipts will jump in the 2025-26 tax year as that tax is due by 31st January 2026.
Rising equity prices are expected to contribute to a revenue boost towards the end of this Parliament, but forecasts for 2029-30 showed the largest downward revision of £5.5bn, underlining the sensitivity of long-term projections to policy and behavioural shifts.
The main rates of CGT were increased at the October Budget from 10% to 18% for basic-rate taxpayers, and from 20% to 24% for higher rate taxpayers.
For a limited time, sellers can still benefit from a reduced CGT rate of 10%, subject to a lifetime limit of £1m of qualifying gains under BADR.
This limit was cut from £10m during Rishi Sunak’s time as Chancellor.
From 6th April 2025, the BADR relief will be reduced so that gains are taxed at 14%, rising to 18% from 6th April 2026.
The same timeline applies to the main, lower rate of CGT.
These changes have been described as a further tax on small businesses and a disincentive for entrepreneurs to establish new ventures in the UK.
The Laffer Curve – which models the relationship between tax rates and Government revenue – suggested that raising tax rates beyond a certain point can reduce revenue by altering taxpayer behaviour.
This theory contributed to the Government’s decision not to equalise CGT and income tax rates in October.
Government figures showed that raising both the lower and higher CGT rates by 10% would have led to a total loss of £2.05bn for the Exchequer by 2027-28.
Instead, ministers opted for a smaller 4% rise in the top rate of CGT in an effort to reach the ‘sweet spot’.
However, there are signs that the behavioural response to October’s announcements – particularly the cuts to entrepreneur reliefs – may have been underestimated, with the revised forecasts indicating that CGT receipts could fall well short of expectations.
Higher CGT rates may discourage investment in growth assets, potentially limiting long-term returns and dampening demand for the UK stock market – both of which are key to the Government’s stated economic objectives.
Some taxpayers may also defer asset disposals in hopes of more favourable rates in future fiscal environments.
Although Inheritance Tax (IHT) may apply to estates, beneficiaries inherit assets at their probate value, meaning there is no CGT payable on gains realised before death.
CGT is only applied to any increase in value after the person has died.
This prevents double taxation but may also incentivise people to retain assets during their lifetime and avoid gifting them.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “There are indications that the Government has grossly underestimated how behaviours would have been impacted by the tax rises and cuts to relief for entrepreneurs announced in October 2024, and may receive less than expected.”
