Capital gains tax branded ‘ripe for reform’ ahead of Budget

Capital gains tax is “ripe for reform”, a leading think tank has said, as Chancellor Rachel Reeves considers possible revenue raisers ahead of October’s Budget.

With a range of potential tax rises on the table, the Resolution Foundation has joined a chorus of voices arguing that the levy needs to be reformed.

In a report published today, the think tank argued that rates of capital gains tax (CGT) are “unjustifiably lower” compared to other forms of income.

Currently, the rate of capital gains sits at 20 per cent on all chargeable assets other than residential property, where the charge is 24 per cent. In contrast, the highest rate of income tax is 45 per cent.

The Resolution Foundation suggested a range of reforms to the levy, including aligning CGT rates for shares with dividend tax rates; taxing property capital gains like wages; and introducing CGT exit charges when moving country.

Alongside these reforms, the think tank said that inflation-indexing, abolished by Gordon Brown, should be reintroduced. This would create a tax-free rate of return which would be particularly beneficial for long-term investments.

This package could raise anything up to £12bn, which would come close to closing the shortfall in departmental funding for this year.

Could capital gains tax reform be included in the Budget?

But the Chancellor may have to go further. The new government has signed up to spending plans which imply that unprotected public services will face cuts worth £19bn over the course of the parliament.

To address these pressures while also meeting the fiscal rules, the Chancellor is likely to have to increase a range of other taxes quite significantly.

The think tank argued that the Chancellor should close loopholes in inheritance tax which “undermine public trust in the tax” and also reform levies on pensions.

Under the current inheritance tax rules, savings kept in defined contribution pension pots can be passed on tax free.

Agricultural land can also be passed on without paying tax while shares in London’s AIM market receive special treatment if held for two years before death. Ending these reliefs could help raise £2bn, the Resolution Foundation said.

When it comes to pensions, the think tank said Reeves should levy employer national insurance on employers’ pension contributions.

“Doing this at the same time as abolishing NI on employees’ pension contributions would leave a typical worker saving via auto-enrolment better off, while still raising £9bn overall,” it said.