Prime Minister Andy Burnham is facing fresh pressure to overhaul the UK's capital gains tax (CGT) system, with leading economists and political figures calling for the rates to be aligned with income tax bands. The proposal, which would add a third CGT band, could generate an estimated £12 billion per year for the Treasury, according to proponents.
Call to Equalise CGT with Income Tax
Carsten Jung, head of the economy team at the Institute for Public Policy Research (IPPR) think tank, has argued that aligning CGT with income tax rates would be a logical step for the Labour government. Under current rules, CGT is charged at 18% or 24%, depending on an individual's earnings, while income tax bands stand at 20%, 40%, and 45%.
Jung's comments come as Lord Kinnock, a prominent Labour figure, has publicly backed the same reform on Sky News. Kinnock, who was recently praised by Burnham for his rhetoric, stated that equalising CGT with income tax rates – 20%, 40%, and 45% – would raise a substantial amount, around £12 billion annually.
Economic Context and Fiscal Headroom
Jung noted that Burnham and Chancellor John Healey have inherited a more favourable economic situation than their predecessors, Sir Keir Starmer and Rachel Reeves. "Rachel Reeves, for all of her strategic mistakes, really fixed the public finances," Jung said. "What she inherited from Jeremy Hunt was unsustainable. It was based on cuts to departmental spending which weren't sustainable. So she went to the painful exercise of increasing taxes to fix that."
"What Andy Burnham inherits is a much better funded state, and he also has headroom against the fiscal rules he inherited, which makes it less dire," Jung added. This headroom, he suggested, provides an opportunity to consider further tax reforms without immediate fiscal pressure.
Proposed Reforms and Revenue Potential
The proposed change would replace the existing two CGT bands (18% and 24%) with three bands matching income tax rates. This move, also backed by Burnham ally Louise Haigh, aims to create a more equitable tax system. Kinnock emphasised the revenue potential: "[The] equalisation of capital gains tax and the rates of income tax – 20% and 40% and 45% – would raise a very substantial amount, around £12 billion a year."
He added, "And that could make a direct contribution to assisting our national finances with the extra revenue." Kinnock also expressed a personal preference for using these funds to develop a national social care service, which he described as "in dire need of achieving."
Impact and Next Steps
If implemented, the CGT equalisation could significantly increase tax revenues, providing additional resources for public services. However, any such change would require careful consideration of its impact on investors and asset holders. The proposal adds to ongoing debates about tax fairness and fiscal sustainability in the UK.
As the government weighs its options, the call from the IPPR and Lord Kinnock adds weight to the argument for aligning CGT with income tax, potentially reshaping the tax landscape in the coming years.
