Equalising Capital Gains Tax with income tax rates would cost Treasury almost £8bn, IG analysis finds

• Wes Streeting previously proposed bringing Capital Gains Tax (CGT) in line with income tax bands

• Analysis shows equalising CGT with income tax would cost, not raise, money for Exchequer 

• IG warns higher investment taxes risk undermining efforts to boost UK investment culture 

Tuesday 23 June, London - A move by the government to equalise CGT with income tax rates would cost the UK almost £8bn a year, according to analysis from investing and trading platform IG.

Last month former Health Secretary Wes Streeting - rumoured to be in the running for Chancellor should Andy Burnham become Prime Minister - proposed in an interview that Capital Gains Tax should be aligned with income tax bands, suggesting the move could raise billions for the Exchequer.

However, analysis by IG using HMRC’s own published methodology suggests the opposite. Once taxpayer behavioural responses are taken into account, equalising CGT with income tax rates would reduce Treasury revenues by approximately £7.8bn annually.

The loss is primarily driven by the fact that higher CGT rates discourage investors from selling assets. Since CGT is only paid when an asset is disposed of, higher rates can reduce the number of taxable transactions and ultimately lower overall tax receipts. HMRC’s own modelling assumes substantial behavioural responses, including investors delaying or avoiding disposals and bringing forward sales ahead of any announced tax rise.

Using HMRC’s published estimates and CGT taxpayer distribution data, IG estimates that:

A move to increase taxes on the sale of investments would also appear to run counter to the government's stated ambition of encouraging greater participation in investing and revitalising UK capital markets. 

IG is urging policymakers to leave investment CGT rates unchanged and avoid sending the wrong message to potential investors at a time when broader participation in capital markets is needed. 

Michael Healy, Managing Director of UK & Ireland at IG, said: “In a few weeks we will have a new Prime Minister and possibly a new Chancellor in Downing Street. While both will have a difficult job on their hands, we are urging whoever takes office not to reach for the tax lever when it comes to investing.

“At a time when we need more people investing and building long-term financial resilience, making investment gains significantly more heavily taxed risks discouraging participation. The UK already has some of the lowest levels of retail investment among major developed economies and we should be looking for ways to increase engagement, not reduce it.

“Our analysis, based on HMRC’s own published assumptions, suggests that aligning Capital Gains Tax with income tax rates would not only make investing less attractive but would also prove fiscally counterproductive, costing the Treasury billions of pounds.”

-ENDS-

Notes to editors

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About IG Group

IG Group (LSEG:IGG) provides online trading platforms and educational resources to empower ambitious clients around the globe. Headquartered in the UK, IG Group is a FTSE 100 company that offers clients access to c.19,000 financial markets worldwide. 

Methodology

IG's analysis uses HMRC's published Capital Gains Tax ready reckoner and behavioural assumptions to estimate the revenue impact of aligning Capital Gains Tax rates with income tax rates.

Current CGT rates on most financial investments are:

• 18% for basic-rate taxpayers

• 24% for higher-rate and additional-rate taxpayers

Under an equalisation model these rates would become:

• 20% for basic-rate taxpayers

• 40% for higher-rate taxpayers

• 45% for additional-rate taxpayers

HMRC states that these “rate changes are non-linear and asymmetrical. For example, doubling the change in revenue from a 5-percentage-point increase does not accurately predict the change in revenue under a 10-percentage-point increase. Very large tax rate rises can reduce exchequer yield due to taxpayer behavioural impacts.”

The principal behavioural effects are:

1. Lock-in – investors become less willing to sell assets when tax rates increase, reducing the number of taxable disposals.

2. Forestalling – investors accelerate disposals ahead of a tax increase, bringing revenue forward and reducing receipts in subsequent years.

HMRC's published estimates suggest that increasing the higher CGT rate from 24% to 34% would reduce Exchequer revenues by £3.565bn in 2028/29.

Using HMRC's published data, IG estimated:

• A full-base increase from 24% to 40% would reduce revenues by approximately £6.8bn.

• A full-base increase from 24% to 45% would reduce revenues by approximately £9.5bn.

HMRC Capital Gains Tax distribution statistics indicate that:

• Individuals below the higher-rate threshold account for approximately 5% of taxable gains.

• Individuals between the higher-rate and additional-rate thresholds account for approximately 47% of taxable gains.

• Individuals above the additional-rate threshold account for approximately 48% of taxable gains.

Applying the estimated revenue impacts proportionately across each group gives the following indicative annual impact:

Figures are rounded and intended to provide an indicative estimate based on HMRC's published assumptions and taxpayer distribution data.