Nikka Sulton

As speculation grows over the future direction of UK tax policy, attention has turned to the possibility of changes to Capital Gains Tax (CGT). With Andy Burnham widely expected to play a leading role in government, discussions have intensified around whether reforms to CGT could become part of a broader tax agenda.

Although Burnham has previously stated that he would honour Labour’s commitment not to increase the main rates of income tax, VAT or National Insurance, he has also argued that wealth is taxed less heavily than income in the UK. This has prompted speculation that Capital Gains Tax could be an area targeted for reform.

What is Capital Gains Tax?

Capital Gains Tax is paid on the profit made when selling or disposing of an asset that has increased in value.

The tax can apply to a range of assets, including:

Second homes and some residential property
Shares and investments held outside ISAs or pensions
Certain business assets
Valuable personal possessions worth more than £6,000

Importantly, CGT is charged on the gain made rather than the sale price of the asset.

Currently, most basic-rate taxpayers pay 18%, while higher-rate taxpayers generally pay 24% on qualifying gains. Individuals also benefit from an annual tax-free allowance of £3,000, although frozen allowances have resulted in more taxpayers becoming liable for CGT as asset values have increased.

According to HM Revenue & Customs> (HMRC), Capital Gains Tax receipts reached a record level last year, reflecting both rising asset values and recent reductions to the annual exemption.

Possible reforms under discussion

Several proposals have been suggested by senior Labour figures and policy groups.

One of the most widely discussed options would bring Capital Gains Tax rates closer to income tax rates. Instead of the current system, higher-rate taxpayers could potentially face CGT rates similar to income tax bands of 20%, 40% or 45%, substantially increasing the amount of tax payable on qualifying gains.

Supporters argue that aligning the two systems would create a fairer tax structure by reducing differences between income earned through employment and income generated from investments.

Some policymakers also believe the additional revenue could help fund public services.

Changes to inherited assets

Another proposal attracting attention involves the uplift-on-death rule.

Under current legislation, inherited assets are generally revalued to their market value at the date of death for Capital Gains Tax purposes. This means any increase in value during the original owner’s lifetime is effectively ignored when calculating future CGT liabilities.

As a result, beneficiaries who sell inherited assets shortly after receiving them may pay little or no Capital Gains Tax if the property’s value has changed only slightly since inheritance.

Some proposals suggest removing or reforming this rule, meaning gains accumulated during the deceased owner’s lifetime could become subject to Capital Gains Tax when the asset is eventually sold.

Such a change could affect inherited family homes, investment properties and other valuable assets.

Experts question the financial benefits

While supporters believe higher Capital Gains Tax rates could generate additional government revenue, many tax specialists have questioned whether the policy would achieve its intended outcome.

Research published by HMRC indicates that increasing CGT rates does not necessarily result in significantly higher tax receipts over the longer term.

The analysis suggests that relatively small increases in tax rates may generate only modest additional revenue. More substantial rises could even reduce overall receipts if investors alter their behaviour.

Investors may simply delay selling

Financial experts warn that higher Capital Gains Tax rates often influence investment decisions.

Rather than selling assets and paying more tax, investors may choose to delay disposals, retain investments for longer or restructure their finances to reduce their tax liability.

Some may also become less willing to invest in new businesses or property if the eventual tax burden on profits becomes significantly higher.

Analysts argue that these behavioural changes can reduce the volume of taxable transactions, limiting the additional revenue governments expect to collect.

Concerns over the UK’s competitiveness

Some commentators have also warned that significantly higher Capital Gains Tax rates could make the UK less attractive for investors and entrepreneurs compared with other European economies.

Higher tax rates may discourage investment, reduce business activity and slow the movement of capital into new ventures, potentially affecting wider economic growth.

Supporters of reform argue that aligning Capital Gains Tax more closely with income tax would improve fairness within the tax system. However, critics believe policymakers must carefully balance fairness with maintaining incentives for investment and entrepreneurship.

What could it mean for property investors?

For landlords and property investors, any future changes to Capital Gains Tax could have important financial implications.

Higher CGT rates or changes to inheritance rules could increase the tax payable when selling investment properties or passing assets between generations.

At present, no changes have been confirmed, and any reforms would need to be announced through future government policy. Nevertheless, ongoing debate means investors may wish to monitor developments closely and seek professional tax advice before making long-term investment or disposal decisions.