Reforming Capital Gains Tax would raise £14bn while making most Capital Gains Tax payers better off and boosting growth

The current structure of Capital Gains Tax (CGT) is complex, inefficient and unfair. A comprehensive reform would raise an additional £14bn in total revenues, whilst simultaneously taking over 100,000 people out of CGT altogether. It would also remove many existing opportunities for avoidance and improve incentives for capital investment.

These figures come from a new report by the Centre for the Analysis of Taxation (CenTax), using tax data accessed via His Majesty’s Revenue and Customs (HMRC). The report marks the first independent analysis of potential CGT revenues using the same data available to government.

The report proposes a package of five reforms:

1. equalisation of CGT with Income Tax rates, reducing avoidance where people use companies to convert income into gains;

2. introduction of an investment allowance, thereby cutting the effective tax rate for 51% of CGT payers (and leaving it unchanged for a further 7%) while improving investment incentives;

3. removal of uplift at death, which currently allows assets held until death to escape tax, distorting investment incentives;

4. introduction of rebasing on arrival and deemed disposal on departure, which ensures that the gains people make whilst living in the UK are always taxed in the UK, removing the ability to leave without paying;

5. increase the generosity of the treatment of losses, giving more support for genuine risk-taking by ensuring that the government shares in the downside as well as the upside from risky investments.

Equalising rates with a new allowance for investment would reinstate the system introduced by Chancellor Nigel Lawson in 1988, but with a more generous investment allowance. The proposed package of reforms also closes major leaks in the tax base, which would otherwise significantly hit revenues.

The researchers estimate that together these reforms would an additional £14bn in total revenues, even after accounting for changes in behaviour. This is equivalent to almost doubling (88% increase) the £16.2bn CGT base that is currently forecast by the Office for Budget Responsibility for 2025/26. The estimate is for total additional tax revenues, not for additional CGT receipts specifically. A substantial proportion of extra revenue would come from extra Income Tax, as people no longer have an incentive to take their remuneration in the form of gains instead of income.

There is uncertainty about the size of behavioural responses, but even under a worst-case scenario the researchers estimate an increase of £9.6bn, provided that the full package of measures is implemented. This is in contrast to claims based on HMRC’s own revenue estimates, which crucially assume that the tax rate is raised without any other changes. If rates were increased without other reforms, then revenues would indeed be much lower, the report argues. Hiking rates without wider reform would also pose a risk to growth.

The report also finds that there would be more ‘winners’ than ‘losers’ from the combined reforms. Over half (51%) of CGT payers in 2020 would have been better off under the proposed package, and two in five (40%) CGT payers would have been taken out of CGT altogether. Nine out of ten landlords (individuals receiving most of their gains from residential property) would be unaffected or pay less under these plans.

Most (68%) of the additional revenue from the proposed reforms comes from the top 0.1% richest taxpayers (based on their total income and gains over five years). The biggest losers from the reform would be those who currently obtain large gains but have put little or none of their own capital at risk. This includes business owners who receive returns on their labour via a company.

Andy Summers, Director of CenTax and Associate Professor at LSE, said:

“Our proposed package of reforms is about much more than just raising rates. In fact, there’s a big risk that if this is all the government does in the upcoming Budget, it will seriously backfire. There’s big money available, but only if the government is bold and takes on major reform.”

Arun Advani, Director of CenTax and Associate Professor at University of Warwick, said:

“While economists usually emphasise the trade-off between equity and efficiency, CGT is so badly designed that a complete overhaul would make it fairer while also being good for growth. That would make it worth doing even without the extra money we would also raise.”

Andrew Lonsdale, Research Economist at CenTax, said:

“At the moment, over the course of a decade, 97% of people won’t pay CGT. The effects of this reform would be to benefit even the majority of those who do. On the other hand, those who would lose out the most are currently using the preferential CGT rate to reduce the tax on their income from work.”

Read report