With the Treasury under pressure, raising the rate to bring it closer to income tax may look attractive on paper, but it could be a reckless move that leaves the Government collecting less tax, not more. Our analysis suggests that equalising Capital Gains Tax rates with income tax could reduce Exchequer revenues by approximately £7.8bn a year, leaving the Government in an even weaker fiscal position.
The reason is straightforward. Investors do not simply absorb higher tax bills without changing their behaviour. When the tax cost of selling an investment becomes substantially larger, some investors will hold an asset for longer, defer a disposal or decide against realising a gain altogether. Fewer taxable disposals mean less revenue for the Exchequer.
This is not just an argument made by the investment industry. HMRC’s own methodology recognises that large increases in tax rates can reduce revenue because of behavioural responses. Our analysis uses HMRC’s published methodology and assumptions to model the impact of higher CGT rates, supporting the conclusion that raising rates could ultimately reduce receipts. This is the basic principle behind the Laffer curve, which shows that raising a tax rate does not necessarily mean raising more revenue. Beyond a certain point, higher rates can change behaviour and shrink the tax base.
Investors have also had to contend with considerable uncertainty over the rules governing their investments. In the last few years alone, we have seen the annual CGT allowance cut twice, from £12,300 to just £3,000, while the main tax rates have moved from 10% and 20% back up to 18% and 24%. This constant tinkering makes it harder for people to feel confident making long-term investment decisions.
The consequences go beyond the Treasury’s accounts. Britain needs more people to invest for the long term. Encouraging households to move wealth out of cash and into productive assets can build financial resilience, support the wider economy and reduce pressure on the state. This is arguably one of the most fiscally sensible things the Government could do. Therefore the Government should follow through on its commitment, set out in its Financial Services Growth and Competitiveness Strategy, to get more Brits investing, with policies that move the dial. That means making investing a normal part of financial life and using incentives to encourage people to start investing at key moments.
The Government can provide stability for investors while developing policies that bring more households into the investment market, rather than increasing the tax burden in the hope of a revenue boost that may never materialise.
At a time when it says it wants to encourage more people to invest, raising CGT to income tax levels would risk doing the opposite while leaving the Treasury billions worse off. It would be a massive Budget own-goal.
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Michael Healy is CEO of IG Consumer.
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