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Clumsy reforms to capital gains tax could “harm the government’s growth mission,” the Institute for Fiscal Studies (IFS) warned today.
The influential think tank said the levy was “crying out for reform”, but warned that poorly designed measures could do more harm than good.
Capital gains tax is a levy raised on the increase in value of an asset between the points of purchase and sale. It currently raises £15bn a year.
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.
Chancellor Rachel Reeves is rumoured to be considering hiking capital gains tax as she seeks to address an alleged £22bn blackhole in the government’s finances.
Treasury officials have reportedly drawn up plans to equalise capital gains tax with the top rate of income tax, but the IFS warned this would “exacerbate the degree to which CGT discourages saving and investment”.
“Unlike the broad-based tax rises on income and spending that Labour has ruled out, raising large amounts of money from capital gains tax would mean making a big change to a relatively narrow tax base,” it said.
A number of City figures have warned about the potentially damaging impact of a capital gains hike on entrepreneurialism. The lower rate on capital gains is seen as one of the key ways that entrepreneurs make cash through their business, allowing them to pocket more of the profits from any potential sale of assets.
“If you hammer value creators, then you’ve got no hope in hell of achieving your growth agenda,” Lisa Gordon, chair of investment bank Cavendish, told City A.M. earlier this month.
The think tank said that a better approach would be to increase rates while simultaneously narrowing the base on which the tax is levied, which would reduce “distortions to savings incentives”.
Any increase in rates should be also accompanied with allowances for the impact of inflation, it said.
