Rachel Reeves’s decision to raise rates dramatically backfires as investors sell up
Daily Telegraph
The Chancellor’s decision to raise capital gains tax will leave a £23bn hole in the public purse, the budget watchdog has warned.
Rachel Reeves increased the top rate of capital gains tax by 4 percentage points in her maiden Budget last year while stripping back relief offered to those selling companies or shares.
However, analysis of official forecasts suggest the tax raid has backfired as investors raced to sell up their assets before the new rates come into effect.
Following Wednesday’s Spring Statement, the Office for Budget Responsibility downgraded its forecast for capital gains tax intake for every year for the next five years, wiping £23bn off the projected tax intake by 2030.
Immediately following the announcement in October, the main rates of capital gains tax rose from 10pc to 18pc for basic-rate taxpayers, and from 20pc to 24pc for higher-rate taxpayers.
There will also be reductions to business asset disposal relief, which allowed owners to sell companies or shares worth up to £1m while paying a reduced rate of 10pc capital gains tax. Under changes announced by Ms Reeves, this rate will rise to 14pc from April, and to 18pc in 2026.
It means investors have just over a week to benefit from the reduced 10pc rate.
The OBR said capital gains tax intake would fall from £15.7bn to £13.3bn in the next financial year, and that receipts would plummet by billions in the five years following.
By 2030, the watchdog expects the Treasury to pocket £25.5bn in capital gains – a drop of £5.5bn compared to its October forecasts.
Alex Davies, of investment platform Wealth Club, said raising capital gains tax was “a ridiculous move from a government allegedly determined to ‘kickstart growth’.”
He added: “Put rates up and people change their behaviour, from rushing to sell before rates rise to holding on to assets for much longer in hope of a future rate cut. The result is fewer tax receipts long term and less economic growth as people transact less.”
It is the latest blow to the beleaguered Chancellor, who this week was forced to defend abysmal growth projections published by the budget watchdog.
Ms Reeves blamed a world “changing before our eyes” for her decision to slash benefits and cut Whitehall spending. The OBR halved its growth forecast for 2025 to just 1pc – a major blow to Labour’s flagship mission to grow the economy.
Charlene Young, of fundshop AJ Bell, suggested Ms Reeves had fallen foul of the Laffer Curve, an economic theory which argues that government tax revenue is zero when the rate of tax is both zero and 100pc.
Increasing tax beyond the “sweet spot” in the middle will push taxpayers to change their behaviour to get around tax, the theory posits.
Ms Young said there were indications Labour had “grossly underestimated how behaviours would have been impacted by the tax rises and cuts to relief for entrepreneurs”.
She added: “The theory was one of the reasons the rumoured equalisation of income tax and capital gains tax rates didn’t materialise in October.
“The Government’s own figures showed that raising both the lower and higher capital gains rates by 10 percentage points would have meant a total loss of £2.05bn for the Exchequer by 2027-28.
“[Labour] instead aimed to hit the sweet spot with a smaller 4pc rise in the top rate of capital gains tax. “
The Chancellor confirmed there would be no new tax rises, however a previously announced £40bn tax raid will still come into force from April.
Sarah Coles, of Hargreaves Landsown, said changes to capital gains tax often triggered “two very specific responses”.
She said: “Some people will sell up when rumours start circulating. They’re worried about the risk of a higher bill later, so they choose to realise a gain while they know where they stand.
“The other response is that some people will decide never to sell, and instead they’ll hoard assets until they die, when the capital gain resets to zero.”
Ms Coles said that death “is still an incredibly effective capital gains tax planning tool,” but warned that assets are also potentially subject to inheritance tax, which risks double taxation.
Myron Jobson, of Interactive Investor, said many investors had moved assets into tax-efficient vehicles like Isas and pensions, shielding future gains from CGT entirely.
He added: “Faced with a shrinking CGT exemption and steeper tax bills on gains, many investors acted pre-emptively – selling assets before the changes took effect to lock in profits under more favourable tax conditions.”
The Government was approached for comment.
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