Row over claims Rachel Reeves could hike capital gains tax as high as 39%

Chancellor has dismissed Budget speculation but fears are rising over a massive tax hike to fill a £25bn black hole in her plans

Fiscal tightrope: Rachel Reeves needs to raise taxes but does not want to break election promises (PA)

Rachel Reeves is being warned that a massive hike in capital gains tax could endanger her hopes of creating economic growth.

It comes as a row has broken out over claims that the chancellor has asked Treasury officials to model capital gains tax rates of 39 per cent and 33 per cent, well above the second home rate of 24 per cent.

While sources close to Ms Reeves have tried to dismiss Budget speculation and allegations of disarray, the concerns have dropped at a time of intense pressure for the chancellor and Sir Keir Starmer. It follows:

• The Institute for Fiscal Studies warning that she will need to raise £25bn in extra taxes to meet Labour’s spending commitments
• Labour support dropping to less than 30 per cent in Techne UK’s weekly tracker poll for the first time in more than two and a half years as voters turn their backs on the new government
• Starmer repeatedly refusing to rule out a hike on employer contributions to national insurance – a move critics believe will destroy jobs
• Persistent question marks over Labour plans to tax non-doms and add VAT to private school fees.
• Criticism that Reeves should have held her first Budget sooner

The row over capital gains was broken in The Guardian, which claimed to have seen papers on modelling requested by Ms Reeves on an increase of up to 39 per cent.

A source close to the chancellor dismissed the story and denied the government was in “disarray” over its tax plans, adding that they would “not be drawn on Budget speculation”.

But with the Budget set for 30 October, time is running out for Ms Reeves to close a £25bn gap in her spending commitments and available financing identified by the Institute for Fiscal Studies (IFS). This is on top of the £22bn “black hole” that Ms Reeves claims to have been left by the Tory government.

The IFS has speculated Ms Reeves might try to change her fiscal rules to loosen up her ability to borrow but its director Paul Johnson warned “this could spook the markets”.

Starmer has promised sustained economic growth and stability (AFP/Getty)

Instead, having already slashed spending on items like winter fuel payments for 10 million pensioners and cancelling future care for the elderly scheme, it is believed Ms Reeves will have to look at raising taxes.

However, her hands are tied because of Labour’s election promise “not to raise taxes on working people” including income tax, VAT or national insurance employee contributions.

But Ms Reeves is being warned that her hopes of creating economic growth will be harmed by raising capital gains taxes, although experts believe she could make it fairer.

Currently, capital gains tax (CGT) accounts for £15bn a year to the Treasury, less than 2 per cent of revenue, and is raised from around 350,000 people.

Two-thirds of CGT revenue comes from just 12,000 people (0.02 per cent of the adult population) who have average gains of £4m.

Stephen Millard, deputy director of the National Institute of Economic and Social Research, said: “CGT is a tax on savings, something that UK households do not do enough. By increasing CGT, the government would discourage saving, which could have a knock-on effect on investment.

“And, given the emphasis that the current government has put on growth, this would not be something they would want to do.

Capital gains tax hike will hit the sale of second homes (PA)

“Of course, the big question is the extent to which a rise in CGT to the 33 to 39 per cent would put off savings. For instance, it might just result in households transferring their savings from second homes and shares into pension funds or ISAs with no impact on total savings.”

He added: “More generally though, there is a need to simplify the way CGT works. Another principle of good taxation is to widen the base and lower the rate; a reform of CGT along those lines – ie, reducing the number of assets that are exempt from CGT while lowering the rate – would be better than raising the rate on shareholdings and second homes.”

Helen Miller, deputy director at the IFS, said: “Capital gains tax is a small but important tax. Its design is flawed and this matters for both the efficiency and fairness of the tax system.

“The new chancellor should use her first Budget to create a capital gains tax that is fairer and more growth-friendly. The only way to do this is to reform the tax base alongside increasing tax rates. Getting the design of any reform right is crucial. But a sensibly reformed CGT would be a significant prize and should be a priority regardless of how much revenue she would like to raise overall. Good reform would also make it easier to raise significant additional revenue.

“If the chancellor chooses to raise CGT rates while leaving the flawed tax base unchanged, she would be choosing to raise some, limited, revenue at the expense of weakening saving and investment incentives and further distorting which assets people buy and how long they hold them for. That would not be the decision of a chancellor who was serious about growth.”