The move would be part of a wide-reaching plan to help fill a £20bn ‘black hole’ left by the Conservative Government.
Labour has already ruled out raising income tax, VAT and National Insurance during the general election, but it didn’t take changes to CGT off the table.
Reeves is expected to warn about a series of “very tough decisions” in a speech to Parliament today. These could include cuts in funding to road and rail projects, and a spending reduction on external consultants.
However, the exact changes Labour plans to make to CGT, or any other tax regime, will not be announced until the Budget. The party’s first Budget is expected to be sometime in the Autumn, with the date set to be announced in Reeves’ speech later today.
How does capital gains tax work?
CGT mainly applies to investors and anyone who owns (or sells) a second property. CGT isn’t levied on the sale of a main residence.
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The tax is charged on the profits made when certain assets are sold, or transferred to someone who isn’t a spouse or civil partner.
When you make gains above the annual allowance, CGT on stocks and shares can be charged at either 10% or 20% depending on an investor’s other taxable income.
Provided combined taxable income and gains don’t exceed £50,270, 10% CGT on gains above the annual allowance is paid. Where gains and taxable income exceed £50,270, 20% CGT is paid. Where CGT is paid on property, the rates rise to 18% and 24%.
According to Government figures, 2022/2023 was a record year for CGT, with receipts at £16.9bn. This is a fourfold increase in 10 years.
The annual tax-free allowance was cut from £12,300 in 2022/23 to £3,000 in the current tax year.
What changes could be on the way?
One of the suggestions doing the rounds is that capital gains tax rates could rise to match income tax.
This was one of the ideas the Office for Tax Simplification explored in 2020. According to the Institute for Fiscal Studies (IFS), equalising capital gains and income tax rates could raise £16.7bn.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “CGT speculation has intensified. As Rachel Reeves peers into the hole in the public finances and is set to reveal just how deep it goes, rumours are swirling as to whether CGT changes could be used to generate extra cash to help fill it.
“As the OTS highlighted in 2020, in the long-term it runs the risk of people hoarding their profits until they die. This would mean, for example, buy-to-let investors refusing to part with properties they don’t really want in an effort to avoid CGT, while first time buyers struggle to get on to the property ladder.
“The tax system should be encouraging and rewarding long-term investing. This has been absent from the CGT system since taper relief was abolished in April 2008. Right now, investors face the double-whammy of a system that taxes investments that are simply keeping pace with inflation and allows for far lower gains to be realised tax-free each year. If the rates do end up rising, it would add insult to injury. We’d urge the Chancellor to reintroduce incentives that reward long-term investing.”
