NEW ANALYSIS OF CAPITAL GAINS TAX by the Institute for Public Policy Research (IPPR) shows that fair reforms to the tax, that would ensure income from wealth and work are taxed at the same rate, would raise £50 bilion of tax revenue over the next four years. 

In his autumn statement, the chancellor reduced the annual exempt allowance on capital gains from £12,300 to £6,000 in 2023, then £3,000 in 2024.

Yet the chancellor’s reform is forecast to raise just £435 million in 2026/7, dwarfed by the £12 billion that could be raised in the same period if the government embraced taxing capital gains at the same rate as the income tax schedule.

Capital gains tax, paid on the proceeds from selling an asset (such as stocks, bonds, and property) for more than its purchase price, is currently levied at a lower rate than income tax. This means that people who derive their income from existing wealth are taxed at a lower rate than people who work. IPPR says this is unfair, and proposes that a fair system would tax all income at the same rate.

Analysis of a fairer tax on capital gains shows:

  • Taxing capital gains at the same rate as the income schedule could raise £50 billion over the next four years
  • Including an allowance for inflation, revenue falls to £22 billion over the same period, whilst adjusting for ‘a rate of return allowance’ would still bring in £14 billion

In 1988 under conservative Chancellor Nigel Lawson, capital gains moved to being taxed at income tax rates.

IPPR also back other tax proposals that will make the UK tax system fairer and raise more revenue to further offset damaging spending cuts:

  • Extending national insurance contributions to all investment income and pension-age individuals would raise £12 billion per year
  • Abolishing non-dom tax status would raise £3 billion per year
  • Taxing ‘share buybacks’ or transfers of corporate profits to shareholders would raise £225 million per year
  • Replacing inheritance tax with a lifetime gifts tax would raise £9 billion per year

Dr George Dibb, head of the Centre for Economic Justice at IPPR, said: “The chancellor chose stealth taxes over wealth taxes. He was right to look at capital gains tax but wrong to only tweak around the edges. The reforms he announced today will still leave those who earn income from wealth paying lower tax rates than working people. Not only that, he’s leaving tens of billions of pounds on the table and untaxed. This fair reform would help avoid unnecessary cuts to public spending.

“The Treasury’s own autumn statement documents says, “a fair tax system also ensures that individuals doing similar work pay a similar amount of tax” but then concedes that “that those with unearned income also contribute”. Simply contributing is not enough – those who draw unearned income from wealth should pay the same tax as working people.”

* Read Just tax: Reforming the taxation of income from wealth and work here.

* Source: Institute for Public Policy Research