A well-known tax expert for Labour has urged for a review of capital gains to address a projected £30 billion shortfall in public funds.
Arun Advani, the leader of the Centre for the Analysis of Taxation think-tank and the architect of the controversial family farms tax, claims that modifications to the tax are a clear method to generate revenue from the wealthiest individuals and would be more effective than a distinct wealth tax.
However, critics argue that these suggestions might deter companies and investors.
And data from last week showed that earlier efforts to collect more funds through the levy resulted in a significant drop in tax revenues.
A capital gains tax (CGT) is applied to the amount of profit that exceeds a certain limit when an individual sells an asset, like real estate or stocks.
CGT generated £12.1 billion during the 2023-24 tax year, but Mr Advani believes this amount could potentially double if capital gains were subject to the same tax rate as income.
A taxpayer with a 40 per cent marginal tax rate is charged 24 per cent on capital gains, while someone paying the 20 per cent standard rate pays 18 per cent in capital gains tax.
The existing method of using CGT promotes tax evasion,” states Mr. Advani. “If the Government is considering a more effective way to tax wealth, it would be more appropriate to begin by revising capital gains tax.
Members of the left-wing faction in the lower house are urging Chancellor Rachel Reeves to explore implementing a 2% wealth tax on assets exceeding £10 million.
But Business Secretary Jonathan Reynolds stated: “We won’t engage in anything foolish like that.”
Mr. Advani states that reforms should involve more than just aligning the rates of capital gains tax with those of income tax; they should also include establishing an investment allowance, which would motivate individuals to support companies.
Two officials stated that Mr. Advani’s research played a crucial role in the decision to impose inheritance tax on agricultural land valued over £1 million, suggesting his opinions carry significant influence with the administration.
Shadow Business Secretary Andrew Griffith stated last night: ‘Capital Gains Tax is essentially a wealth tax in disguise, particularly because it levies taxes on individuals due to the higher inflation that Labour is responsible for.’
Arun Advani ought to be embarrassed, not coming up with fresh methods for this socialist Chancellor to further damage the economy under her leadership.
Experts claim that aligning capital gains tax with income tax could encourage more business owners to relocate overseas and negatively impact economic development. ‘Raising CGT rates, or even bringing them in line with income taxes, would contradict the Chancellor’s goals of stimulating growth and investment,’ stated Jason Hollands, head of wealth management firm Evelyn Partners.
Last year, HMRC stated that increasing the capital gains tax by 1 percent would generate £200 million annually, which is minimal in the context of government finances, whereas a 10 percent increase would reduce tax revenue.
“If the taxes on profits are considered excessively harsh, individuals will believe the rewards do not justify the risk, which could harm the economy,” stated Mr. Hollands.
HMRC data indicated that earlier attempts to generate revenue through the levy had resulted in unintended consequences.
CGT income dropped by 18 percent to £12.1 billion during the 2023-24 tax year. It is predicted that revenues will decrease further by 10 percent for the 2024-25 tax year.
The levy might cost companies £10 billion
A fresh wealth tax might severely impact businesses even before any funds are collected by the authorities, according to a leading legal firm, Vardags.
Its accountants estimate that UK businesses could face annual cost increases of up to £10 billion, as they would need to hire financial experts to verify if their assets are valued sufficiently to meet the tax’s criteria.
The legislation would cover legal expenses resulting from conflicts with HMRC if there was a disagreement about the value of assets. This would be settled before the tax authority received any funds from the levy. “Considering the high cost of compliance, and the possibility of tens or even hundreds of thousands of disputes related to valuations, a wealth tax could incur billions in costs before any revenue is collected,” said Ben Crowne, a partner at Vardags.
He claimed that any system designed to implement a wealth tax, especially the 2% charge on assets exceeding £10 million supported by left-wing MPs, would result in ‘significant expenses’ and lead to ‘massive’ gaps that could be taken advantage of by individuals with sufficient resources.
Read more
