The proposed increase in capital gains tax (CGT) by Labour's Wes Streeting could lead to a staggering £7.8 billion shortfall for the Treasury, according to new analysis. This figure represents a significant blow to public finances, with the potential to jeopardise government efforts to boost retail investment and stimulate economic growth.
IG's research, based on HMRC data, highlights that elevated CGT rates would deter investors from selling assets, resulting in a reduction of taxable transactions and ultimately diminishing overall tax receipts. This reluctance to sell, driven by the prospect of a higher tax bill, is cited as the primary driver of the projected £7.8 billion loss.
The proposed changes would see basic rate taxpayers' CGT increase from 18 per cent to 20 per cent, while higher rate taxpayers face a substantial jump from 24 per cent to 40 per cent – an increase of 16 percentage points. IG estimates this could lead to a £3.2 billion loss for the Treasury as these investors opt to delay or avoid asset disposal. For additional rate taxpayers, the impact would be even more severe, with their CGT potentially almost doubling from 24 per cent to 45 per cent, resulting in a £4.6 billion reduction in Treasury income due to frozen selling activity.
Michael Healy, Managing Director of UK and Ireland at IG, commented on the findings, stating that making investment gains more heavily taxed risks discouraging participation, particularly at a time when fostering investment and long-term financial resilience is crucial. He added that aligning CGT with income tax rates would not only make investing less appealing but could also prove fiscally counterproductive, costing the Treasury billions.
The analysis suggests that such a tax increase could undermine broader government initiatives aimed at boosting retail investment within the UK economy. Higher taxes on asset sales could reduce the net liquidity investors receive, potentially dampening the incentive to engage with the stock market. This could lead to a loss of the UK's competitive edge and interest among investors, with many choosing to hold onto assets to avoid the increased tax burden, thereby keeping capital trapped rather than circulating in the economy.