Capital Gains Tax: The Likely Target for Hike in Tax Rates

Many are expecting the next budget announcement to be “quite painful.” One tax, however, grabbing the spotlight is the Capital Gains Tax (CGT). There is widespread speculation that the CGT tax rates might rise, potentially matching with the Income Tax rates, which could see the top rate hitting 28%.

However, not everyone agrees that it would be a smart move. A tax expert voiced their concerns regarding it on LinkedIn, stating how some believe that simply doubling the CGT tax rates will double the revenue. However, that is not how it works, especially with CGT, where taxpayers can often choose when to realise their gains. Data by HMRC even suggests that a 10% increase in CGT could reduce the revenue by £400m in 2025-26 and around £1bn in 2026-27.

The Risk of Revenue Loss

This sentiment was followed up by another tax expert, who warned that equalising the CGT tax rates with Income Tax could backfire, potentially losing the Treasury about £2bn instead of gaining the expected £5bn. The main issue with this is that many taxpayers might delay selling their assets, thereby being able to control when they pay CGT. This could negatively impact the CGT intake.

A partner at a tax advisory firm further added on this, stating that the mere rumour of CGT being increased is already making some people rethink their strategies, with some entrepreneurs even considering selling shares in private businesses before the new Budget takes effect. This could, however, be quite tricky for those who are involved in joint investments, especially with private equity firms or partners who have different strategic goals.

Challenges in Reforming CGT

One expert described CGT as “a mess,” explaining that the tax often captures inflationary gains, which could discourage investment. They also emphasised the fact that while raising rates might seem like an easy fix, it is pretty unlikely to bring in the revenue which the government hopes for without causing other economic issues.

Meanwhile, the general tax burden in the UK is already at an all-time high, and while CGT tax rates are at the forefront of discussions, some believe that other taxes, such as Income Tax, could also be on the table for potential increases. Another expert further noted that a 3p rise in the basic rate of Income Tax could potentially recover £20bn that was lost due to the previous National Insurance cuts.

The Broader Tax Debate

The Institute for Public Policy Research (IPPR) has also commented on this, arguing that the current UK tax system acts as a barrier in the efforts to address regional wealth inequality. According to one of their senior research fellows, the tax system’s bias towards wealth is a major barrier to improving the country’s economic landscape.

As the government prepares to make some tough decisions in the upcoming Budget, the debate around CGT tax rates and other taxes is sure to intensify, with experts calling for a careful, informed approach to avoid unintended consequences.

Conclusion

While hiking CGT tax rates could fill the revenue gap the government has been talking about, it could also burden investors and common people. So, it needs to be done with much consideration.