Why the Chancellor is right to rule out changes to capital gains tax

Compared to this time last year, there have been relatively few rumours swirling around the contents of this month’s Budget. No news should probably be considered good news on that front – but there was one suggestion about the Chancellor’s plans that, while on the face of it might have seemed small, could have ended up having a much wider impact than intended.

The potential equalisation of capital gains tax with income tax rates would have sent exactly the wrong signal to businesses and savers at a time when we need to encourage both to invest. Inflation remains sticky and interest rates look likely to rise again, taking a toll on confidence. Another disincentive on investment in the form of a tax on any gains made from taking risk may just have been the straw that breaks the camel’s back.

While we will only know for certain on the day, reports have suggested the Chancellor has now ruled out the idea. But it is worth putting capital gains in some context to demonstrate why raising it in line with income tax would end up being counterproductive.

Adrian Murphy, CEO of Murphy Wealth​​​​​​​

HMRC figures show the government raised £24.2 billion through the tax in the 2024/25 tax year – and that was an 89 per cent increase on the previous 12 months. That came after the tax-free allowance on capital gains was substantially reduced from £12,300 as recently as 2023 to just £3,000 today.

But it is not as simple as raising the tax and assuming more money will flow into the government’s coffers. A range of previous cases where the tax has been increased to a certain point have shown that people simply hold on to their assets. The Exchequer may receive a short-term boost as investors and businesses realise gains at a lower rate before any increases, but beyond that most will avoid selling them and triggering a tax liability.

At the same time, it would risk pushing individual savers back into cash. The latest ISA figures from HMRC suggest we are beginning to turn a corner on the UK’s attitude towards saving, with a surge in the number of people using their allowance for stocks and shares. Earlier this year trading and saving platforms also reported significant rises in the number of people investing.

Savings held in an ISA are obviously not liable for tax on the interest, income, or increase in value on any assets held within them, but capital gains does apply to investments held outside of the wrapper. Estimates indicate there is around £2 trillion of cash sitting in bank accounts in the UK, much of which could be invested – our calculations suggest savers could be missing out on as much as another £2tn of returns on that figure over the next decade.

If the government did consider raising capital gains tax, then it would have to be combined with an increase to entrepreneurs’ relief, which has been reduced significantly in recent years and is acting as a brake on the economy. More often than not, entrepreneurs take the proceeds of selling their businesses and reinvest them in new ventures – but that is being slowed by the amount of tax they now face on exit.

With all the changes that have been brought in over the last few years, capital gains is one of the very few viable options left available to the Chancellor. While it may seem a logical way to raise money, it is a perfect example of a good theory failing on contact with reality, only serving to undermine the progress made on encouraging investment as an alternative to sitting on the supposed ‘safety’ of cash.

Adrian Murphy, CEO of Murphy Wealth