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Capital gains tax needs “serious reform” to make it fairer and more growth-friendly, said an influential think-tank that also proposes increasing rates in the Budget on October 30.
In a report published on Sunday, the Institute for Fiscal Studies called for a string of reforms including ending the forgiveness of CGT at death as this creates “a very big” incentive for people to hold on to assets well past the point at which it is efficient for them to do so.
The IFS said that ultimately rates should be aligned across all forms of gains and income, saying this could mean significant increases to CGT rates.
“Capital gains tax needs serious reform, not just more tweaks,” the report said. As designed, the CGT “reduces UK productivity and growth” by discouraging saving, investment and risk-taking and leading to a misallocation of capital away from its most productive use, according to the think-tank.
“The government needs to focus on reform and not just on changing rates,” said Helen Miller, deputy director at the IFS and an author of the report.
She pointed to estimates by the UK tax authority that raising the capital gains tax rate by 1 percentage point in April 2025 would result in just £100mn extra revenues in 2027—28. A 10 percentage point increase would actually reduce revenue by about £2bn that year, because people will change their behaviour and hold on to assets to avoid paying the CGT.
Instead chancellor Rachel Reeves “could raise significant revenue if she did a bigger reform” Miller suggested. If the chancellor “was tempted to just raise rates by 5 or 10 per cent, that’s not going to get big money and it would upset a lot of people politically for not much return,” she said.
Currently, CGT rates vary significantly across assets and are almost always significantly lower than tax rates on income. This creates “undesirable distortions” to what people invest in and how they choose to work, the IFS said.
The think-tank also suggested removing the business asset disposal relief — a preferential CGT rate for business owner-managers — arguing it was not well targeted at entrepreneurship.
Instead, the Labour government should give more generous deductions for investment costs to boost investment, according to the IFS.
To avoid people leaving the UK before realising gains, thus avoiding UK CGT, the IFS suggested one option could be to tax people emigrating from the UK on their accrued gains, the increase in value of an asset or investment that is not sold. The government could also exempt new arrivals from UK CGT on gains they made whilst living abroad.
The report comes ahead of the Budget in which the chancellor has the challenge of boosting economic growth, as promised in the Labour election manifesto, amid high taxes and the highest public debt since the 1960s.
CGT is paid by around 350,000 people each year, corresponding to only 0.65 per cent of the adult population. Two-thirds of CGT revenue comes from just 12,000 people, or 0.02 per cent of the adult population, who have average gains of £4mn.
