Treasury at Risk: Reeves' Capital Gains Tax Plan Could Backfire

Official analysis suggests that a proposed increase in capital gains tax (CGT) by Rachel Reeves could result in a £2 billion loss for the Treasury. This revelation comes as economists express concerns about potential risks to economic growth if investors are targeted in the upcoming Budget on October 30, 2024.

HM Revenue and Customs estimates indicate that a 10 percentage point increase in the higher CGT rate could lead to a £2 billion revenue loss in the 2027-28 fiscal year. This projection is based on anticipated changes in investor behavior to avoid the higher tax burden.

The potential side effects of a CGT hike include a reduction in property transactions as landlords refrain from selling homes, subsequently impacting stamp duty revenues. Chris Etherington, a partner at RSM, suggests it's "highly unrealistic" to expect significant revenue from a substantial CGT increase.

Investors typically respond to tax increases by either selling assets before implementation or holding onto investments until rates decrease. Etherington notes, "CGT rates have fluctuated considerably over the past 15 years, so investors might choose to wait it out."

Currently, higher-rate income taxpayers face a 20% CGT on most assets like business shares and 24% on residential property. CGT is projected to raise over £15 billion in 2024, increasing to more than £20 billion annually later this decade.

"Cutting the property tax would in fact increase revenues because there would be more transactions."

Stephen Millard from the National Institute of Economic and Social Research warns that raising CGT rates could harm the economy by disincentivizing investment, potentially impacting long-term growth and supply.

Alternative approaches to raising revenue have been suggested. Stuart Adam of the Institute for Fiscal Studies proposes scrapping CGT reliefs, such as the rule that eliminates potential CGT bills upon an asset owner's death. The IFS estimates that abolishing this relief could raise £2.3 billion.

Labour's plan to change the taxation of carried interest in the financial sector has also come under scrutiny. Treasury analysis from 2020 suggests this move could trigger an exodus of cash and talent, potentially resulting in annual losses of around £350 million by 2025.

As the debate continues, policymakers must carefully consider the potential consequences of CGT reforms on both revenue and economic growth.