Reeves to raise capital gains tax on sale of shares

Rachel Reeves will use her budget to increase capital gains tax on the sale of shares and other assets but will not change the rate for second homes.
The Times has been told that capital gains on profits from the sale of shares, which is currently levied at a higher rate of 20 per cent, is likely to rise by “several percentage points”.
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Ministers have discussed going further but there are concerns that people would deliberately defer selling assets in a bid to avoid being hit by higher rates.
As well as raising capital gains on share profits, Reeves is also expected to end some reliefs in the current regime to increase potential revenues as she seeks to repair the public finances and avoid a return to austerity.
One government source suggested that revenues from increasing capital gains tax would be in the “low billions”.
The chancellor will leave the rate of capital gains tax on the sale of second homes and buy-to-let properties untouched amid concerns that increasing it would cost money.
When the Conservatives lowered the rate from 28 per cent to 24 per cent at the last budget, the Office for Budget Responsibility said that doing so would actually raise nearly £700 million because of increased property transactions.
More than half of all capital gains relates to the sale of shares, while just 12 per cent is from the sale of property.Capital gains tax is levied on profits of more than £3,000 from the sale of assets but self-invested personal pensions (SIPPs) and ISAs are exempt. There are an estimated 12.5 million private shareholders but the tax is only paid by 350,000 people a year.
However, increasing the rate of capital gains tax on the sale of shares could still generate billions for the Treasury as the bulk of revenues — just over half — come from the sale of unlisted shares in private companies, which enjoy an average gain of just over £120,000. By comparison, the average capital gain on the sale of listed shares is £18,000.
Last month the boss of Next sold £29 million of his shares in the homewares giant, leading to speculation among City analysts that the sell-offs were in anticipation of changes to capital gains tax.
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Sir Keir Starmer, the prime minister, has signalled that the government will increase capital gains tax but rejected reports it could rise to as much as 39 per cent. He said that the suggestions of such a big rise were “wide of the mark”.
Reeves is drawing up plans for up to £40 billion worth of tax rises and spending cuts to avoid a return to austerity and real-term cuts to government departments. Most of the money will have to come from tax rises.
However, the prime minister is facing a cabinet backlash after the Treasury asked departments to draw up plans for “huge” cuts for departmental spending.
Angela Rayner, the deputy prime minister and housing secretary, and Shabana Mahmood, the justice secretary, and Louise Haigh, the transport secretary, have raised concerns about the scale of the cuts and implications for their core budgets.
Treasury sources pointed out that even though departments had been asked to model large cuts to their budgets this did not necessarily mean that they would be imposed. Reeves has been explicit that there will be no return to austerity.
Labour is also considering plans to reduce the amount that people can draw down from their pensions as a lump sum without paying tax. The current allowance is £268,275, but Labour is considering reducing it £100,000 in a move that would raise £2billion.
However, there is concern about whether the tax rises planned for the budget will raise enough.
Revenues from capital gains tax are highly unpredictable because changes in the behaviour of a small number of individuals could have a significant impact. Just 12,000 people pay two-thirds of the £15billion a year raised from capital gains tax.
A Treasury source said that the government would not raise taxes if it resulted in losing money for the exchequer, adding that capital gains tax is “not a silver bullet”.
HMRC has estimated that increasing capital gains tax by 10 points would result in lower revenues for the Treasury. “Very large tax rate rises can reduce exchequer yield due to taxpayer behavioural impacts,” it said.
The Institute for Fiscal Studies said that any increases in capital gains tax should be accompanied by reforms to the system, such as charging capital gains tax on assets after people die.
Stuart Adam, a senior economist at the Institute for Fiscal Studies, said: “Simply increasing headline rates of CGT would raise limited revenue and cause economic damage. If the chancellor wants to raise significant sums, it is essential that rate increases are accompanied by changes to the way the tax works — removing some ill-conceived reliefs while giving more generous deductions for investment costs and losses.”
The Treasury has decided not to change the rate of capital gains on additional properties after the Office for Budget Responsibility concluded that the cut in the spring budget will lead to more house sales, increasing income from stamp duty.
“The cut in the higher rate of capital gains tax on residential property disposals from 28 to 24 per cent cumulatively raises tax revenues over the forecast period, through two channels,” the forecaster said.
“First, we expect that lowering the rate will ‘unlock’ and so bring forward, some qualifying property disposals. Second, we expect the lower rate to have a small but permanent positive impact on the level of property transactions. Most of the additional tax from this measure relates to higher SDLT [stamp duty] receipts.”
The biggest tax rise in the budget is expected to be from the imposition of national insurance on employers’ pension contributions, which could raise as much as £12billion.
Reeves is also expected to look at inheritance tax and pension tax relief to try to balance the books.