Economists caution against ‘simple solutions’ on capital gains tax

Economists have cautioned against pursuing “simple solutions” to raising money at next month’s Budget following calls by a Labour donor to increase capital gains tax.

Clean energy tycoon Dale Vince, who has previously donated millions to Labour, has reportedly urged ministers to bring capital gains tax in line with income tax.

He has also suggested ending interest payments from the Bank of England to commercial banks on their reserves, and using the proceeds of both measures to fund an increase in the personal tax allowance from £12,570 to £15,570.

But Institute for Fiscal Studies (IFS) director Helen Miller suggested a much wider tax reform would be needed to be sure of raising enough cash.

She told the Press Association: “We shouldn’t just think that there’s a simple solution where you put the rate up and all this money arrives at the Treasury.”

Wider reforms could involve changes to stop taxing inflationary gains, she said, and looking “very seriously at what happens when people leave the country”, along with incentives for entrepreneurs and start-ups.

Ms Miller added that there would also be “a huge amount of uncertainty” over how much increases to capital gains tax rates would raise, making it difficult to be sure it would cover the more certain costs of increasing the personal allowance.

Her comments were echoed by Pranesh Narayanan, a senior research fellow at the think tank IPPR, who said reforming capital gains tax could raise £8-14 billion per year.

Saying the policy was similar to those pursued by Nigel Lawson as chancellor under Margaret Thatcher, he said: “Overall, the proposal is likely to benefit the efficiency of the economy and the fairness of the tax system.”

Backbench MP Chris Curtis, who chairs the Labour Growth Group, said the policy was “certainly the right thing to look at” but also “more complicated than people make it out to be”.

Earlier this year, the Labour Growth Group proposed wide-ranging reforms of capital gains tax that, it said, could fund a 2p cut in national insurance.

The personal allowance has been frozen at £12,570 since 2021. Had it risen with inflation, it would now have reached around £16,070.

Mr Vince has called for the allowance to be increased to just below that level, suggesting a £15,570 figure would “give millions a meaningful boost, with the biggest benefit going to those on the lowest incomes”.

Speaking to the BBC, he also said the freeze in the personal allowance had “impaired the economy” and reversing it could increase growth by 1.2%.

But former Conservative Treasury minister Sir David Gauke cast doubt on whether the policy would work.

He told the BBC: “There isn’t, I’m afraid, an easy answer whether that’s the banking sector or a few high net worth individuals, our tax system is already very dependent upon the very wealthy.

“I’m afraid that answers that sort of sound terrific and mean ordinary people are unaffected are not going to be credible.”

In last November’s budget, then-chancellor Rachel Reeves announced the freeze on the personal allowance, as well as income tax thresholds, was due to continue until 2031.

The extended freeze is expected to bring in an extra £66.6 billion between 2022 and 2031, according to the Office for Budget Responsibility.

The IFS has suggested raising the personal allowance would cost £800 million per £100 increase in the long term, and would benefit upper-middle income households the most.

Shortly after becoming Prime Minister, Andy Burnham suggested he would “look at” the personal allowance, but made no firm commitment to increasing it.

On Monday, Mr Burnham’s spokesman said: “Decisions on tax are a matter for the Chancellor to set out at fiscal events.”

Conservative Party leader Kemi Badenoch said she would not support an increase in capital gains tax, telling reporters in Oxfordshire: “Capital gains tax is a tax that encourages people to invest so that they know that if they make a profit, they can keep it.

“But if we’re telling people that once you make a profit we’re going to be taking most of it away, they probably won’t invest here in the first place.”