UK: Labour could hike CGT for wealthy individuals moving overseas

The potential for an increase in Capital Gains Tax (CGT) by the UK Labour Party has become a focal point of discussion as the party prepares for its upcoming budget on October 30, 2024. This move is seen as part of Labour’s broader strategy to raise funds for public services without increasing income tax, national insurance, or VAT. Here’s a detailed exploration of the implications and context surrounding this potential policy change.

Understanding Capital Gains Tax (CGT)

CGT is a tax levied on the profit made from selling certain assets, such as shares, second homes, and business assets. The current structure allows for different rates depending on the taxpayer’s income bracket:

• Basic Rate Taxpayers:
  • 10% on gains from most assets
  • 18% on gains from residential property
• Higher Rate Taxpayers:
  • 20% on gains from most assets
  • 28% on gains from residential property
  • 24% on carried interest for fund managers

Individuals benefit from an annual allowance of £3,000, below which no CGT is due. This allowance has decreased significantly from £12,300 in 2020, making it easier for individuals to incur CGT liabilities.

Labour’s Position on CGT

Labour’s leadership, particularly Shadow Chancellor Rachel Reeves, has indicated that while there are no immediate plans to increase CGT, the party has not ruled out adjustments post-election. The party’s manifesto suggests a desire to align CGT rates more closely with income tax rates, which could potentially raise between £8 billion and £16 billion for the Treasury.

Speculation and Preemptive Actions

As Labour’s intentions become clearer, wealthy individuals in the UK are reportedly taking preemptive action by selling off assets. Wealth managers have noted that there is a growing trend among high-net-worth individuals to liquidate their holdings in anticipation of a CGT hike, with some considering relocating abroad to avoid higher taxes. This has raised concerns about a potential “brain drain” of entrepreneurs and investors who contribute significantly to the UK economy.

Risks of Increasing CGT

Increasing CGT poses several risks:

1. Brain Drain: Wealthy individuals may choose to leave the UK for countries with more favorable tax regimes, such as Portugal or Italy. This could result in a significant loss of talent and investment in the UK economy.
2. Economic Impact: A rise in CGT could discourage investment and entrepreneurship. Many wealthy individuals are highly mobile and may relocate to jurisdictions with lower tax burdens, which could stifle economic growth and job creation in the UK.
3. Public Sentiment: While Labour aims to position itself as a party for the working class, increasing taxes on wealth could be politically contentious. The party must balance the need for revenue against the potential backlash from affluent voters and businesses.

Conclusion

The Labour Party’s consideration of an increase in CGT reflects a broader strategy to address the UK’s fiscal challenges without raising the more politically sensitive taxes like income tax or VAT. However, the potential implications of such a move are complex, involving economic, political, and social dimensions. As the party prepares for its budget announcement, the reactions from both the public and wealthy individuals will be crucial in shaping the future of CGT in the UK.