Tax experts have warned that Labour leader contender Wes Streeting’s pledge to align capital gains tax with income tax could have unintended consequences.
Former Health Secretary Wes Streeting is proposing to equalise CGT with income tax to create “a wealth tax that works” as part of his Labour leadership bid.
Under the proposal, CGT would be taxed at 20%, 40% and 45% depending on a person’s overall income and profits from assets, while loopholes allowing earnings to be structured as capital gains would also be targeted.
Maike Currie, VP personal finance at PensionBee, said: “Equalising Capital Gains Tax with income tax would represent a major shift in the UK’s approach to investment, savings and wealth creation and could have serious unintended consequences for the country’s already sluggish economic growth.
She said using higher CGT rates as a lever to raise more revenue for the government would be “short-sighted” as it would jeopardise investment when the UK needs capital flowing into the country.
“Risking a capital flight and a reduction in the tax base would be a major own goal,” she added. “While the argument for fairness may resonate with some, capital gains are not the same as earned income. They are often the result of entrepreneurship, long-term investing, risk-taking and inflationary asset growth. Penalising investors, landlords and small business owners who reinvest those gains could stifle economic activity and innovation.”
“There is also a wider confidence issue. After repeated cuts to allowances, frozen inheritance tax thresholds and plans to bring pensions into IHT from April 2027, savers and retirees already feel the goalposts are constantly moving.
“For many families, wealth is tied up in homes, pensions and businesses rather than spare cash. As leadership hopefuls compete to outbid each other with promises of ‘wealth taxes that work’, they should tread carefully to ensure the great wealth transfer does not slowly become wealth erosion.”
Anna Warren, tax director at global wealth manager Bentley Reid, noted that when CGT rates were previously aligned to income tax rates, up until 2008, there were also reliefs in the form of indexation, which removed the inflationary element of any gains, or taper relief, which reduced the tax rate the longer the asset was held.
“In both cases, the effective rates ended up being much lower,” she said. “The system was replaced with a flat-rate tax system for simplicity, with a standard 18% rate, and a lower effective rate for entrepreneurs at 10% up to £1m.”
She continued: “The Laffer curve has consistently shown that increasing taxes too high will impact behaviour to such an extent that the tax take will be lower. In fact, the increases in the last few years have resulted in the amount collected from CGT fell by 8%.
“Wes Streeting will need to introduce some form of indexation or taper relief, which reduces the effective tax rate, and brings back the complexity the last Labour government under Gordon Brown decided to scrap. Or Wes may soon become very familiar with the Laffer Curve and his £14bn in extra CGT might be but an idealist dream.”
