The UK government is considering potential changes to capital gains tax (CGT) as Chancellor John Healey prepares to deliver his budget next month amid ongoing discussions about the tax’s role in raising revenue. CGT is paid on the profit from selling assets such as shares, businesses, and properties. Currently, basic-rate taxpayers pay 18%, while higher-rate taxpayers pay 24%. A higher 32% rate applies to certain City fund managers through a system called “carried interest.” These rates increased significantly following the 2024 Labour government’s efforts to tax wealth more heavily.

Advocates for raising CGT rates argue that the current system is unfair because it taxes investment income at a lower rate than earned income, which faces tax rates starting at 20%. Some experts and politicians on the left, including members of the Labour party and think tanks such as the Institute for Fiscal Studies (IFS) and the Institute for Public Policy Research (IPPR), advocate aligning CGT rates more closely with income tax rates. They contend that doing so would shift the tax burden away from wages toward unproductive capital accumulation and reduce distortions that encourage people to hold onto assets to avoid tax.

However, opponents warn that increasing CGT rates could discourage productive investment and economic growth. Business groups such as the British Chamber of Commerce argue that the UK’s current CGT rates already exceed the OECD average and that further hikes could spur wealthy individuals to relocate abroad. Critics also raise concerns about the potential for higher rates to be undermined by tax avoidance strategies.

Tax specialists acknowledge the complexity of raising CGT revenue due to the tax’s behavioural sensitivity. Capital gains tax is only paid when assets are sold, giving investors some control over timing. Analysts note that while planned increases in CGT could theoretically raise substantial revenues, individuals may alter their behaviour by delaying sales, accelerating disposals before changes take effect, or restructuring investments to reduce tax liabilities. Recent data suggest receipts from CGT have been volatile and in some months lower than the previous year, indicating such behavioural responses may already be occurring.

Proposals to reform CGT more comprehensively alongside rate increases have been suggested to address these issues. Suggested measures include introducing an “exit tax” on wealthy individuals who move overseas, removing exemptions on inherited assets, and offering an investment allowance that would exempt gains merely reflecting general inflation. These combined reforms aim to make the system fairer and more effective in raising revenue without discouraging productive investment.

Aside from CGT, Chancellor Healey faces choices among other potential tax-raising options such as income tax, national insurance, value-added tax, a bank windfall tax, or expanding an upcoming “mansion tax.” However, the Labour government has ruled out raising income tax and national insurance, focusing attention on alternative measures.

Whether CGT changes will feature prominently in next month’s budget depends in part on the fiscal outlook from the Office for Budget Responsibility, particularly regarding energy price projections and the impact on borrowing costs. While a modest or narrowly focused budget is anticipated, sharply worsening economic forecasts or increased support for consumers facing energy costs could prompt the government to consider more substantial tax adjustments, with CGT a likely candidate.