The Institute for Fiscal Studies (IFS) has put forward a comprehensive set of proposals for reforming Capital Gains Tax (CGT), suggesting that aligning its rates more closely with Income Tax could significantly boost government revenue. In a detailed report, the independent think tank argues that the current CGT system is not only inefficient but also creates an unfair disparity, largely benefiting wealthier individuals.
Key recommendations from the IFS include taxing capital gains at the same rates as income, which currently range from 20% to 45% for basic, higher, and additional rate taxpayers respectively. This would mark a substantial shift from the current CGT rates of 10% and 20% for most assets, and 18% and 28% for residential property and carried interest. The IFS estimates that such a change, combined with other reforms, could generate an additional £11 billion each year for the Exchequer, providing a considerable sum for public services or deficit reduction.
Another significant proposal is the abolition of 'uplift at death'. Under current rules, when assets are inherited, their value for CGT purposes is reset to the market value at the time of death, meaning any gains accrued during the deceased's lifetime are never subject to CGT. The IFS describes this as a major loophole that disproportionately benefits those with substantial assets, allowing significant wealth to be passed down tax-free. Removing this provision would ensure that gains are eventually taxed, regardless of inheritance.
The IFS also calls for a review of various CGT reliefs and exemptions, with a view to simplifying the tax landscape and making it more equitable. While acknowledging that some reliefs, such as Principal Private Residence Relief on an individual's main home, serve important social purposes, the report suggests others may be less justifiable. The think tank emphasises that any reforms should be carefully considered to avoid unintended consequences and ensure a smooth transition.
While these are recommendations from an independent body and not government policy, the proposals come at a time when public finances remain under pressure, and discussions around tax reform are frequent. The Labour Party has previously signalled an interest in reviewing CGT, although specific commitments have varied. Any move by a future government to adopt such reforms would likely face significant debate, particularly regarding the impact on investment incentives and wealth distribution.