Budget rise in Capital Gains Tax 'would be counter-productive'

HURST tax partner Adrian Young looks ahead to the Autumn Budget in this article.

He says: “I don’t recall ever seeing the level of interest in a fiscal event comparable to what we are witnessing for the forthcoming Autumn Budget.

“I think this is driven by two factors. Firstly, chancellor Rachel Reeves will deliver Labour’s first Budget in 14 years.

“Secondly, the £40bn black hole that the new government has identified in the public finances needs to be filled, and speculation is rife as to how this will be achieved.

“The chancellor has spent the summer recess setting expectations. She has said that the Budget will be ‘painful’, and inevitably that leads to the assumption that further tax rises are afoot.

“But who will bear the burden?

“I expect Reeves will stick to Labour’s manifesto pledges to not raise the headline rates of income tax, national insurance contributions (on employees at least), VAT or corporation tax.

“Given that these, and particularly income tax, account for a significant proportion of the overall tax take, I imagine the black hole will have to be filled with a wide range of alternative tax-raising measures.

“The smart money is currently on capital gains tax, employer’s national insurance contributions, pension tax relief and inheritance tax.

“Reeves could increase CGT from its current standard rate of 10-20 per cent to something between that and income tax rates of 40-45 per cent, so perhaps somewhere around the 28-30 per cent mark.

“A worst-case scenario (at least for those who have to pay CGT) would be an alignment with income tax rates, perhaps softened with enhanced indexation reliefs for those who have held on to the assets for a period of time.

“My feeling, however, is that this would be a counter-productive move.

“If her intention is to raise public revenues, there is a danger that a significant rise in the CGT rate would result in less tax being collected. This is because CGT is in effect a voluntary tax – it’s only paid on disposal of assets. If the tax burden becomes too high, people will simply hold on to their assets.

“This could in turn lead to some level of economic stagnation, as much buying and selling of private businesses is facilitated by beneficial CGT rates for entrepreneurs.

“It is also worth remembering that the creation of employment is a hugely-important role played by privately-owned businesses. Employment reduces welfare costs and contributes to the Treasury coffers via income tax and national insurance contributions.

“In my view, it would be a mistake not to recognise through the tax system the key role entrepreneurs have in creating employment.

“So, whereas I expect some level of increase in CGT rates is inevitable given the red lines Reeves has set around other taxes, I would hope that any increase is modest.

“Another area of focus has been Labour’s mantra that it will not burden hard-working people.

“However, Reeves may have taken a look at the significant amount of tax revenues raised in recent years by ‘fiscal drag’.

“This is the phenomenon whereby tax-free amounts such as the annual personal allowance do not keep track with increases in salary, which ‘drags’ more people into higher income tax brackets.

“Were Reeves to extend the current freeze on personal allowances that was introduced by the Conservative government, this would significantly enhance the overall tax take, without having to break any of the manifesto promises about headline tax rates for working people.

“As I said, expectations have been set very low, but nevertheless I am looking forward to hearing the Chancellor’s Budget announcement. If nothing else, it will be interesting to see how she sets out the economic tone for the next few years of government.”

If you have any questions or would like to explore the topics covered in the article, please don't hesitate to contact Adrian Young at adrian.young@hurst.co.uk or give us a call at 0161 477 2474.