Too much, too soon? Capital gains tax at the Autumn Budget

In summary

• With the big taxes ruled out by the manifesto, capital gains tax is an obvious candidate for rises

• Labour figures have pushed to equalise it with income tax, but that risks undermining investment and growth

• One option may be to differentiate between long-term and short-term gains, reintroducing some recognition of the impact of inflation

• However, the effect of any changes is highly uncertain and subject to behavioural changes. For the Chancellor, there’s no guarantee of a quick win

Figures released last week show capital gains tax (CGT) receipts for the 2024/25 tax year hit a record £24.2 billion: an 82% increase on the previous year.

According to HMRC, increases to the main rates of CGT in October 2024 (when it rose from 10% and 20% to 18% and 24%) and the reductions to the tax-free allowance (cut from £12,300 to £6,000 in April 2023 and to £3,000 in April 2024) both contributed to the rise; the number of taxpayers paying CGT was up 45% to a record 584,000.

So, too, however, did the announcement that the business asset disposal relief (BADR) rate would increase (to 14% from 10%) from April 2025, and speculation before the Rachel Reeves’ first Budget in October 2024 that rates would rise again. Individuals rushed to realise gains before the expected increases.

Now, with speculation over tax rises focusing on CGT again, we may be about to see a repeat performance.

On the one hand, the temptation for the government to look to CGT as its borrowing costs soar is understandable. First, CGT already brings in significantly more revenue than some of the other targets for tax rises. Inheritance tax receipts for the 2024/25 tax year were little more than a third of those collected for CGT, at £8.2bn, for example, and IHT is a deeply unpopular tax. Second, manifesto pledges and other promises have ruled out rises on a range of the biggest revenue generators.

The idea of increasing CGT – often with the suggestion that it should be equalised with income tax rates – has found favour with a range of Labour figures, including former leader Lord Kinnock, First Secretary of State Louise Haigh and Defence Secretary Wes Streeting.

No wonder, then, that economist Lord O’Neill, who declined to join the Prime Minister’s top team over the summer, says it’s an obvious target.

“They’ve ruled out the three main taxes, so if they’re going to have to find some money to balance the books, something like capital gains tax looms out as one of the things you’d go go for, not least because traditionally most Labour think tanks think it makes sense to equalise that to income tax,” he told Andrew Marr earlier this week.

He has also said it would be stupid.

Capital gains tax rates have already increased in recent years, while reliefs have reduced. The problem for the government is that it’s not clear further hikes will increase the tax take.

That’s because it’s a voluntary tax in many cases. Individuals can often avoid paying by choosing not to realise their gains – or reduce their bill by bringing forward sales to pre-empt a rate rise. Consequently, the haul in 2024/25 is likely to have been paid for by lower receipts in 2025/26. We already know that in CGT on UK property returns to April 2026 are lower than in the previous year.

HMRC’s own estimates last year of the impact of potential tax changes calculated that increasing either higher or lower CGT rates by 1% might increase revenues, but more dramatic increases of 5% or 10% would actually result in a lower haul of revenue.

Increasing BADR might yield more money, but it’s highly uncertain. As Lord O’Neill pointed out in his interview with The Times, business owners could defer selling or move abroad. Most CGT is from a small number of taxpayers who make the largest gains: In 2024/25, 45% of CGT revenues came from less than 1% of taxpayers making gains of £5 million or more. More than half (52%) was from the 17% of individuals with taxable incomes above £125,140.

It therefore doesn’t take a large number of people changing behaviour to have big impact on the tax take.

Perhaps more fundamentally, increasing capital gains tax would act as a dampener on rather than a catalyst for starting and investing in risk-taking businesses. UK business investment is already among the lowest in the G7 and has been since the financial crisis in 2008. The first quarter, meanwhile, saw the lowest opening three months for new business creations on record.

The post-Keir Starmer Labour government is at pains to emphasise that it is sticking to its 2024 election winning manifesto; but this manifesto also championed kickstarting growth as its primary mission and mentioned growth 49 times.

As we’ve said before, a middle ground might be to tax long-term and short-term gains differently, as in the US. This would bring the latter rate closer to or equal to income tax rates, while leaving or possibly even reducing the former.

This has the advantage of addressing a long-standing inequity of the CGT: that it has taken no account of inflation since the abolition of indexation allowance in 2008 – a significant issue in a period where average house prices are now worth less in real terms than 20 years ago.

While it would partially address that problem, differential rates for long and short-term gains do nothing to resolve the other issues with CGT. The tax remains largely voluntary, receipts are volatile, and the impact of changes is highly uncertain. Even the record receipts in 2024/25 still accounted for less than 3% of tax revenues collected that year so it’s unlikely to solve too many of the Chancellor’s problems.

Meanwhile, changes are open to having a myriad of unintended consequences for asset sales and investment decisions. If introduced with immediate effect, as the last two CGT changes have been, they also create an added administrative burden for tax payers and others not set up to report gains at different rates during different periods of the same tax year. The government would also forgo any spike in receipts from those seeking to avoid the rise, which it would get if announcing it in advance.

Of course, there may still be a case for reforming CGT after years in which reliefs for business owners have been gradually eroded (from a peak of a 10% rate on unlimited qualifying gains) and at a time when we really need to encourage Britain’s entrepreneurial spirit. If the Chancellor does make changes at the Budget, our recommendation would be to boost long term growth rather than a chimera of short-term tax take.

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