The government would be playing a “dangerous game” by hiking capital gains tax and could end up slashing its own revenue, the Centre for Policy Studies (CPS) warned today.
With just a week to go until the Budget, the Chancellor Rachel Reeves looks likely to lift the levy on capital gains as she seeks to raise £40bn through a series of punitive revenue-raisers and spending cuts.
But the CPS pointed out that the charge – which raised £14bn last year – makes 80 per cent of its revenue from just 38,000 people, meaning is particularly sensitive to behavioural changes.
“Labour is playing a dangerous game with capital gains tax,” Daniel Herring, tax and fiscal policy researcher at the CPS, said.
“The full effects are uncertain, but it is very possible that any rise in CGT will raise much less revenue than analyses suggest, and could very easily be revenue-negative.
“The tax rises Labour appears to be planning would not just be bad for growth, but could make the fiscal situation even worse,” he said.
The Treasury’s own estimates suggest hiking capital gains tax by 10 percentage points would lower revenue by £2bn over three years, if no other reforms were implemented alongside.
Currently the rate higher earners pay is 20 per cent, with 24 per cent paid on the sale of second homes.
A further relief for owner-managers of businesses, known as Business Asset Disposal relief, enables them to pay a 10 per cent rate up to a maximum gain of £1m across their lifetime.
Reports suggested that the government was considering hiking the standard rate as high as 39 per cent, although the Prime Minister has since said the rumours were “wide of the mark”.
The latest rumours suggest the rate on share sales will be increased by a few percentage points while some other reliefs will be cut.