The Chancellor swiftly enacted higher taxation in her recent budget, with an immediate increase to the capital gains tax (CGT) rate. The tax on profits gained from assets such as stocks has risen from 10% to 18% for basic-rate taxpayers, while higher-rate taxpayers now face a hike from 20% to 24%. Notably, the rates applied to property remain unchanged. The Chancellor argued that the UK’s CGT rates are the lowest among European G7 nations, but is this increase justified? We examine both perspectives.

Nimesh Shah, CEO of Blick Rothenberg

This tax increase appears to be more of a political statement than a genuine effort to generate significant revenue.

The Office for Budget Responsibility estimates that the changes could generate £2.5 billion annually by 2029-2030, accounting for behavioral changes in taxpayer responses. Leading up to the budget announcement, speculation regarding an alignment of CGT with income tax rates of up to 45% had already raised expectations, potentially accounting for much of the projected revenue.

Currently, CGT generates only £15 billion a year, which represents less than 2% of total tax receipts, indicating that the justification for raising CGT may lean more on principle than on financial reasoning.

In the weeks approaching the budget, expectations of a CGT increase prevailed, setting a tone suggesting that the UK was unsupportive of entrepreneurial risk and investment — two crucial components necessary for fostering future economic growth as mandated by the government. The introduction of a CGT rate hike seemed to imply that a correction was needed.

This signals a detrimental message; a properly structured CGT should incentivize and acknowledge productive investment risk.

Rachel Reeves expressed her intent for “entrepreneurs to invest in their businesses” and confirmed the continuation of the £1 million lifetime limit on business asset disposal relief. However, the current CGT rate of 10% is set to rise to 14% in April 2025 and 18% by April 2026.

This series of increases represents a missed chance to provide adequate support for entrepreneurs aimed at unlocking the growth potential within the UK business landscape.

While many entrepreneurs and investors may feel relieved by the relatively modest hike in CGT, the overarching structure of the CGT system remains convoluted, encompassing five different rates without an adjustment mechanism for inflation. The new Chancellor had a significant opportunity to enact comprehensive CGT reforms that could stimulate entrepreneurship and investment.

Support for the Increase

Rachelle Earwaker from the Joseph Rowntree Foundation

The Chancellor’s decision to amend CGT and align it more closely with income tax was certainly appropriate.

The budget illustrated the necessity of reassessing spending, borrowing, and taxation under current economic conditions. To enhance living standards and improve public services—such as healthcare, education, and housing—the government must increase its tax revenue.

A reformed tax system should boost economic efficiency and equate capital gains with income from labor. This CGT reform not only raises funds for essential public services but also contributes to creating a fairer tax system.

Preferential tax treatment based solely on asset value appreciation versus earned income is unjustified. The increase in the main CGT rate is a step towards closing this disparity in taxation.

Moreover, the adjustments in pension, business, and agricultural assets concerning inheritance tax (IHT) are commendable. Similar to CGT, IHT requires reform as it disproportionately benefits the wealthy and well-informed.

The existing approaches to IHT and CGT have significantly influenced social mobility, dictating whether individuals can advance their circumstances without relying on substantial inheritances or investment gains.

Immediate implementation of the CGT increase was prudent to avert a surge of sales aimed at sidestepping the hike.

This budget indicates the Chancellor’s commitment to tackling urgent areas of tax reform. It’s a promising initial step, and there’s hope for further ambitious measures in future fiscal policies to simplify and enhance the fairness of the tax system.