Chris Etherington

Written by: Chris Etherington

Chris Etherington


Could the Chancellor's CGT plan backfire?

With the current Chancellor’s hands seemingly tied by manifesto commitments not to raise income tax, national insurance and VAT, it’s no surprise that he is reportedly exploring whether a hike in Capital Gains Tax (‘CGT’) could bolster the Treasury’s coffers. Would it make sense to raise CGT rates so that they are aligned with income tax rates?

In the last decade or so, several of the Chancellor’s predecessors have considered the same conundrum: what is the most appropriate CGT rate?

The rationale is not always the same. Some have pushed the rate up and down to ensure there is fairness in the tax system (for example, if the gap between the tax rates on gains and income has drifted too far apart). Others have done the same to try to encourage investment in business and entrepreneurial behaviour.

The current resident of Number 11 will presumably have raising tax revenues as his primary driver for such a policy. If so, he should look carefully at what impact CGT rate tinkering has had on tax revenue receipts in the past, both here in the UK and in other major economies.

In the most recent national statistics on CGT revenues published by HMRC, it outlines that £9.5bn of CGT revenues were generated in the 2018/19 tax year from 276,000 taxpayers.  

Of that amount, 40 per cent of CGT came from less than 1 per cent of CGT taxpayers who made gains of £5 m or more. Influencing the behaviour of this relatively small number of taxpayers could therefore have a big impact on the level of CGT receipts. Ultimately, these taxpayers can choose not to sell their assets and so not trigger any CGT if they perceive the rate to be too high.

The statistics also highlight how tax receipts have ebbed and flowed historically in response to changes in the CGT rate. Tax rates alone are not the only factor, as the wider economy impacts on asset values. However, looking at some of the key CGT rate changes in more recent times, a pattern emerges whereby an increase in CGT rates appears to drive down receipts and a cut in rates pushes them up. It can also be seen that from 2012 onwards, CGT receipts rose substantially, perhaps influenced by the decision in 2011 to increase the lifetime allowance for Entrepreneurs’ Relief to £10m per person.

This pattern can also be seen in respect of rate changes in other countries. In their policy briefing document, “The Effect of Capital Gains Tax Rises on Revenues”, The Adam Smith Institute tracked the historical impact of CGT rate changes in the USA and identified a similar pattern of rate hikes leading to a fall in tax receipts.

If the Chancellor is not careful, his cunning plan could backfire and leave him with lower tax receipts rather than the windfall he might be hoping for.

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