LONDON: The leadership crisis around Prime Minister Keir Starmer has renewed a debate over how the British government should raise revenue, and given those on the left of the ruling Labour party confidence to promote their pet cause: wealth taxes.
Andy Burnham, the betting markets’ favourite to replace Starmer, believes the country has “overtaxed labour and undertaxed wealth” and, at his official campaign launch last week, proposed higher taxes on land.
His potential rival for the top job, Wes Streeting, is considered a more centrist option yet last week called for a “wealth tax that works” and pledged to raise the rate on capital gains to at least that applied to income from working.
Streeting’s plan to align capital and income tax rates has support from other parties; the Liberal Democrats included it in their election pitch back in 2024, while the socialist Green Party has since joined the call.
In a perfect world, the reform could raise as much as £10bil a year while removing distortions and loopholes in the system –but taxing wealth is rarely so simple.
Capital gains taxes (CGT) are highly unreliable as people can choose when to take their gains. For that reason, revenue estimates vary wildly.
Aligning CGT with income tax would lift the lower rate to 20% from 18%, the higher rate to 40% from 24% and introduce a 45% top rate.
Streeting believes it could raise £12bil, citing research from the Centre for the Analysis of Taxation.
In 2024, the LibDems estimated their plan, including an allowance for inflation, would net just £5.2bil.
HM Revenue & Customs believes the opposite is true, that a 10 percentage point increase in CGT rates would cost the exchequer more than £6bil across three years, as people chose not to cash in their gains so no tax would be liable.
This choice of when to pay CGT can make receipts very lumpy.
Chancellor of the Exchequer Rachel Reeves raised CGT in her October 2024 budget and receipts subsequently hit a record £24.3bil in 2025-26, up from £13.7bil a year earlier and £7.4bil above the previous record.
However, the Office for Budget Responsibility said the increase was down to people crystallising their gains before the October 2024 budget, when Reeves raised CGT rates.
Tax on those gains was paid in January this year and receipts in that month were £18.9bil, roughly £8bil more than any previous January.
Rachel Griffin from tax firm Quilter also put the revenue boost down to timing, as investors “brought forward disposals”.
She said revenues may now “slow as higher tax rates take hold and investors adjust behaviour”.
The wealthy may choose to sit on investment and property gains in the hope that a more conservative government returns to power at the next election in 2029 and reverses the policy.
Nigel Farage’s Reform UK party leads the polls and is opposed to higher CGT, as is the Tory party – currently second in the polls.
Farage, meanwhile, has leaned into his populist appeal by pledging to scrap income taxes on overtime for some workers.
Tax rises are back on the agenda largely because of Britain’s precarious public finances: with national debt approaching 100% of gross domestic product, those on the left of the political spectrum must grapple around for new sources of revenue.
They are afraid of sparking a bond market rout with more borrowing, particularly given the experience of short-lived Conservative PM Liz Truss nearly four years ago.
The Labour government is keen to help British families cope with higher costs stemming from the war in Iran, but wary of the need to fund any giveaways.
Recent Treasury analysis suggests a 2022-style £50bil package for households would add about £600 a year to the average new mortgage and cost the government billions of pounds more in debt interest.
Tax rises are not an easy option, though. Reeves said in Washington last month that she has already raised them enough.
“My two budgets have both increased taxes substantially, and I would prefer not to have to do that again,” she told reporters.
The UK tax burden is at a post-war high. — Bloomberg
