- The Office for Budget Responsibility (OBR) has reduced its capital gains tax (CGT) forecasts to the tune of £23 billion
- This indicates that the government has underestimated the behavioural impact of tax hikes in the October Budget
- Could the CGT uplift on death be a target for the chancellor to get disposals moving?
Charlene Young, senior pensions and savings expert at AJ Bell, says:
“Just five months after tax rises announced in the October Budget, the OBR has taken a red pen to capital gains tax forecasts, wiping £23 billion off the projected tax take by 2030. That’s despite the hike in tax rates in the October Budget and reductions to the relief on offer under the Business Asset Disposal Relief (BADR) rules.
“According to the OBR, capital gains tax is forecast to raise £13.3 billion this tax year – equal to 0.5% of GDP. But this is 8.5% lower than what came through the door in 2023-24.
“A rush to cash in gains before the October Budget means receipts will jump in the 2025-26 tax year as that tax is due by 31 January 2026. Rising equity prices are expected to contribute to a revenue boost towards the end of this Parliament, but figures for 2029-30 also see the largest downward revision of £5.5 billion, showing just how finely balanced these projections are, and the butterfly effect of changes along the way.”
Source: OBR
What might be behind the revision?
“The OBR figures are just forecasts and real events are of course yet to play out. But the revisions likely reveal the unpredictable behavioural changes that can emerge when taxes change.
“The main rates of capital gains tax were increased at the October Budget from 10% to 18% for basic-rate taxpayers, and from 20% to 24% for higher rate taxpayers. For another week or so, sellers can benefit from a reduced rate of capital gains tax at 10%, subject to a lifetime limit of £1 million of qualifying capital gains under the BADR rules. The lifetime limit was cut from £10 million when Rishi Sunak was chancellor.
“For disposals from 6 April 2025, the relief is being reduced so that gains are taxed at 14%, and from 6 April 2026, qualifying assets will be subject to tax at 18% – the same is true of the main, lower rate of CGT. These changes were considered to be a further tax on small business and a disincentive for entrepreneurs to set up new businesses in the UK.
“The Laffer Curve illustrates the relationship between rates of tax and the amount of revenue the government would receive. It suggests that increasing tax above a certain ‘sweet spot’ alters taxpayer behaviour to the extent that the revenue would go down.
“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 CGT rates by 10 percentage points would have meant a total loss of £2.05 billion for the Exchequer by 2027-28.
“Government instead aimed to hit the sweet spot with a smaller 4% rise in the top rate of CGT. But there are indications that the government has grossly underestimated how behaviours would have been impacted by the tax rises and cuts to relief for entrepreneurs announced in October 2024, and may receive less than expected.
“Higher rates of capital gains tax might deter people from investing in growth assets in the first place, potentially depriving them of higher long-term returns, while at the same time undermining demand for the UK stock market. All of which form the foundation of the government’s stated objectives.
“Likewise, we’ve seen that people will realise gains before an expected tax hike in order to avoid paying higher rates of tax. It’s equally possible some taxpayers will simply decide to sit on assets for longer, hoping to wait out today’s higher tax rates and realise gains on assets under a more accommodating tax environment in the future.”
CGT uplift on death
“Although inheritance tax (IHT) might apply to the estate of someone who has died, their beneficiaries inherit assets at their probate value. This means that there’s no capital gains tax payable on death and the beneficiaries will only have to pay it on any increase in value after the death.
“This prevents double taxation in the form of both CGT and IHT when someone dies but it does encourage people to sit on gains during their lifetime and avoid making lifetime gifts of assets. According to the Institute for Fiscal Studies (IFS), who called for the uplift to be scrapped last year, economists tentatively suggest that the annual cost of it is about £1.6 billion.
“Capital gains tax being wiped out on death also creates an incentive in some cases to hold onto assets so they are taxed as part of the estate under IHT, potentially paying less or no tax. But if the government scrapped this tax break, there would likely need to be some allowance made to account for inflation. Otherwise, people who have owned investments for a very long time would be severely punished.”
Source AJ Bell/OBR
