The proposed alignment of capital gains tax (CGT) with income tax has sent shockwaves through the UK's entrepreneurial community, prompting a flurry of activity to crystallise investment gains ahead of potential hikes. The stakes are high, with £14bn in additional revenue potentially up for grabs – but past experience suggests that such moves can be double-edged swords.
The current 24% top rate of CGT for top-rate taxpayers would rise to 45%, matching the highest income tax band, should Andy Burnham become Prime Minister. Proponents argue this 'wealth tax that works' would shift the burden away from earned income towards 'unproductive capital accumulation', but critics warn it could deter future investment and drive entrepreneurs out of the UK.
The proposed rate hike would place the UK's CGT significantly higher than other developed economies, with Denmark's 42% levy on gains exceeding DKK 158,800 (£18,000) cited as a comparative benchmark. The potential for a 45% rate has prompted many investors to reconsider their timelines for realising profits, with some looking to complete transactions before the new government's first Budget.
However, experience suggests that significant changes to CGT can lead to behavioural responses from investors. For example, Rachel Reeves' decision to raise the top rate of CGT from 21% to 24% reportedly resulted in lower overall tax receipts as taxpayers delayed or avoided realising gains in a higher-tax environment.
The uncertainty surrounding CGT is already influencing strategic decisions among UK businesses, particularly those with long-term investment cycles or expansion plans. Financial advisers are noting discussions among clients about becoming non-UK tax residents to minimise liability to UK CGT, underscoring the broader implications for the UK's attractiveness as a place for investment and wealth creation.