Capital Gains Tax Alterations Proposed by Reeves Result in a Significant Decrease in Treasury Revenue
Decrease in Capital Gains Tax Revenue Despite Rate Hikes
In a surprising turn of events, the collection of Capital Gains Tax (CGT) has decreased recently, despite an increase in rates in the Autumn Budget of 2024. According to HM Revenue and Customs (HMRC), CGT receipts dropped from £17 billion in 2022/23 to £14.5 billion in 2023/24, and further to £13.1 billion in 2024/25.
The reason for this decrease can be attributed to behavioral timing effects and transitional factors. Many taxpayers accelerated disposals before the October 2024 Budget announcement to avoid the higher rates that were to come into effect. This "selling ahead" reduced immediate CGT collections but is expected to lead to higher revenues in subsequent years.
The main rates of CGT rose from 10%/20% to 18%/24% in the 2024 Budget, and further increases on carried interest rates are effective from April 2025. The chancellor also announced a two-stage increase in the rate for Business Asset Disposal Relief and Investors' Relief, from 10% to 14% from 6 April 2025, and from 14% to 18% from 6 April 2026. However, these changes have not yet had a significant impact on CGT revenues.
The Office for Budget Responsibility (OBR) predicts that CGT receipts will nearly double over five years, rising by nearly 50% in 2025/26 to around £20 billion as the higher rates come into full effect and behavioral responses normalize.
While the government's decision to slash CGT allowances and hike rates has been criticized by some experts, such as Shaun Moore, a tax and financial planning expert at Quilter, who stated that the government's decision has backfired. There are concerns that higher CGT rates might discourage investment and complicate efforts to promote retail investing.
In addition to the CGT changes, there has been renewed speculation about a wealth tax in the 2025 Autumn Budget. Campaigners have suggested a 2% wealth tax payable by individuals with wealth over £10 million, which could potentially raise up to £15 billion annually. However, wealth taxes also risk encouraging capital flight, complex avoidance strategies, and may affect incentives for saving and investment. The precise design and implementation details will be critical in mitigating such downsides.
In summary, the decrease in CGT collections is a temporary dip due to taxpayers realizing gains before rate hikes took effect. Longer-term government projections and the OBR anticipate significantly higher CGT revenues as rate changes settle and new rules come fully into effect. A wealth tax could substantially patch government revenue shortfalls but carries risks related to economic behavior and tax avoidance. Future tax policy will need to balance revenue needs with maintaining incentives for investment and savings.
Example of CGT Liability
For example, if someone purchases a painting for £5,000 and sells it subsequently for £25,000, they are liable to tax on the £20,000 gain they made.
Additional Resources
For more information on ways to cut your capital gains tax, please refer to our separate article on the topic. It's important to note that the rates of CGT on residential property remained unchanged in the 2024 Budget. Additionally, the two rates of CGT on carried interest were replaced with a single 32% rate from 6 April 2025 in the 2024 Budget.
Political Developments
In political news, Labour leader Keir Starmer refused to rule out a wealth tax at Prime Minister's Questions on 9 July 2024, adding to the speculation surrounding the potential implementation of a wealth tax in the future.
References
[1] HM Revenue and Customs. (2024). Capital Gains Tax: Rates and bands. gov.uk. Retrieved from https://www.gov.uk/guidance/capital-gains-tax-rates-and-bands
[2] Office for Budget Responsibility. (2024). Economic and fiscal outlook - November 2024. gov.uk. Retrieved from https://www.gov.uk/government/publications/autumn-budget-and-spending-review-2024/autumn-budget-and-spending-review-2024--2
[3] HM Treasury. (2024). Autumn Budget and Spending Review 2024: Fiscal event report. gov.uk. Retrieved from https://www.gov.uk/government/publications/autumn-budget-and-spending-review-2024/autumn-budget-and-spending-review-2024--2
[4] Institute for Fiscal Studies. (2024). A wealth tax in the UK: What might it look like? ifs.org.uk. Retrieved from https://www.ifs.org.uk/blog/a-wealth-tax-in-the-uk-what-might-it-look-like
[5] Resolution Foundation. (2024). A wealth tax for the UK: What would it look like? resolutionfoundation.org.uk. Retrieved from https://www.resolutionfoundation.org/blog/a-wealth-tax-for-the-uk-what-would-it-look-like/
- Despite the increased Capital Gains Tax (CGT) rates and recommendations for a potential wealth tax, some investors might still be looking for ways to minimize their CGT liability, especially in light of the unchanged rates on residential property.
- With the 2025 Autumn Budget approaching, people interested in personal finance and business trends should consider subscribing to a newsletter that provides updates on CGT, potential wealth taxes, and investment strategies for mitigating these taxes, such as the one outlined in the additional resources section mentioned in this article.
