Could an increase in capital gains tax help tackle the cost of living?

The government is reportedly looking at increasing capital gains tax (CGT) rates to help those on the lowest incomes.

The prime minister Andy Burnham and chancellor John Healey are understood to be mooting raising capital gains tax rates to as high as 45% to pay for a potential £3,000 hike to the tax-free personal allowance from £12,570 to £15,570.

The proposal is presented in a Budget submission from the Labour donor and green energy entrepreneur Dale Vince, The Telegraph reports.

According to modelling by economic research institute the National Institute of Economic and Social Research (NIESR) commissioned by Vince and seen by the publication, a £3,000 increase in the personal allowance would leave the lowest fifth of earners £600 a year better off.

It would cost the Treasury £20 billion but could be funded by increasing CGT rates and ending interest payments on Bank of England reserves while Vince said giving money back to lower earners through a lower income tax bill would also help stimulate the economy.

The proposals are reportedly being considered by the Treasury and No.10 ahead of the Autumn Budget next month.

A Treasury spokesperson said: “As has always been the case, decisions on tax are a matter for the chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals.”

What are the current rates of capital gains tax?

Currently, basic rate taxpayers pay a capital gains tax rate of 18%, while higher and additional rate taxpayers pay 24%.

The capital gains tax allowance is £3,000 per year, so you’re only taxed on any capital gains which exceeds this.

CGT has been targeted by both the previous Conservative Party government and the current Labour government in recent years.

The lower and higher rates of CGT were raised with immediate effect in the 2024 Autumn Budget while the tax-free allowance was slashed from £12,300 to £6,000 in 2023 and then halved to £3,000 in 2024.

Could increasing capital gains tax rates be worth it?

A number of people close to Burnham have called for a change in the CGT rules to drum up cash for the Treasury.

In May, Louise Haigh, now first secretary of state, called for CGT to be brought closer to income tax rates.

“It would shift the taxation burden away from punishing work, and towards unproductive capital accumulation which does little to grow the everyday economy,” she said in an essay published in the Renewal journal.

In the same month, defence secretary Wes Streeting also called for CGT rates to rise in line with income tax bands.

Dan Neidle, tax lawyer and founder of the Tax Policy Associates think tank, said he thought Streeting’s proposal was “good”, suggesting the extra money brought in from raising CGT could be used to cut the basic rate of income tax.

“That would be a brave thing for a Labour politician to do, but in my opinion the right thing at this moment. Spend the rest on e.g. defence,” Neidle said.

However, the Centre for Policy Studies (CPS) has suggested significantly raising CGT rates could actually cost the Treasury money, as it would lead to behavioural changes.

Daniel Herring, head of economic and fiscal policy at the CPS, said: “It punishes the kind of productive investment the country needs to grow, those most likely to pay it can and will leave the country.”