Capital gains tax needs to increase, think tank warns

Capital gains tax (CGT) is unfit for purpose and should be reformed, including aligning the rates it is levied at with income tax rates, influential think tank the Institute for Fiscal Studies (IFS) has argued.

Ahead of the Autumn Budget on 30 October, when chancellor Rachel Reeves is widely expected to announce some form of tax hike, the IFS has published a report urging the government to deliver a “serious reform, not just more tweaks” of CGT.

The report argues that CGT distorts the system by encouraging people to hold on to assets for longer than they may otherwise wish, and that it ultimately discourages savings and investment.

The IFS reform plan includes offering more generous deductions for asset purchase costs, improving loss relief and abolishing CGT uplift at death (CGT currently does not apply to assets held until death). In addition, tax rates should be aligned across all forms of gains and income, which would involve significant increases to CGT rates, the report says. For example, higher-rate taxpayers currently pay CGT at 20 per cent on assets other than residential property, against the corresponding 40 per cent rate of income tax.

Helen Miller, deputy director of the Institute for Fiscal Studies, said: “‘The new chancellor should use her first Budget to create a capital gains tax that is fairer and more growth-friendly.”

A CGT hike in the Budget appears a likely option after the government ruled out increases to income tax, national insurance, VAT and the headline rate of corporation tax. Making inheritance tax (IHT) reliefs less generous could also be on the cards.

Increasing CGT rates without additional reform, Miller added, would “raise some, limited, revenue at the expense of weakening saving and investment incentives and further distorting which assets people buy and how long they hold them for. That would not be the decision of a chancellor who was serious about growth.”

Ian Dyall, head of estate planning at Evelyn Partners, said abolishing CGT uplift at death is a “relatively under-the-radar possibility that could well prove attractive to the chancellor”. “It could raise a decent amount even though the implications could take a while to sink in for many people,” he noted.