Wes Streeting’s plans to align capital gains taxes while introducing an investment allowance could be “disruptive” for growth as City advisers have become divided over the benefits of sweeping reforms.
Streeting told the BBC last week that he backed a plan, first proposed by the Centre for the Analysis of Taxation (Centax) and later adopted by the parliamentary caucus of MPs, the Labour Growth Group, to hike capital gains taxes and align the rate with income tax rates.
But some City analysts have warned that reforms could be “hugely disruptive” – undermining some “really innovative” aspects of the proposed reforms.
The plan set out by Centax in 2024 called on capital gains taxes to be equalised with income rates in an echo of the Margaret Thatcher government’s move to rebase assets to market values and align bands across the two different taxes.
Nigel Lawson’s indexation allowance meant capital gains taxes were only levied on real profits rather than paper gains caused by inflation. They were subsequently tweaked by multiple Chancellors, including Gordon Brown, Alistair Darling, George Osborne and, most recently, Rachel Reeves.
Centax economists and moderate Labour MPs have argued that an investment allowance would improve incentives for entrepreneurs while the removal of uplift at death would reduce distortions in the tax regime.
However, Blick Rothenberg analyst Sean Drury warned speculation over drastic changes could “lead to asset fire-sales to crystallise unrealised gains”.
“[This] would be hugely disruptive at a time when economic stability is needed,” Drury said.
But he added that there were some “really innovative” aspects around the idea that could be “pro-growth”.
A note from the advisory firm said that investors were likely to take proactive decisions on shifting their assets ahead of the changes coming into force. It added that the prospect of a wider wealth levy – backed by other groups of Labour MPs and previously entertained by Streeting – would put government revenues at risk.
Another City tax analyst separately told City AM that capital gains taxes proposals set out by Streeting and Centax were “nonsense”.
Tax proposal gets some support
Several other experts have struck a more upbeat tone about proposed capital gains taxes reforms.
Tax Policy Associates chief Dan Neidle said ideas put forward were ”good” while Panmure Liberum’s Simon French endorsed the Labour Growth Group’s report on shifting taxation away from work and on to assets.
Right-leaning economist Julian Jessop said that any increase in capital gains taxes should be used to cut other levies although projected revenue from changes would be “uncertain”. Labour Growth Group MPs said the tax hike should fund a cut in national insurance paid by employees.
Centax’s report suggested that the government could make an extra £14bn by making reforms though HMRC calculations suggest that it would slash revenue by £5.7bn, according to Bloomberg.
Capital gains tax receipts have fluctuated between £16.9bn and £13.1bn in recent years. The Office for Budget Responsibility said in 2025 that its forecast judgments were “highly uncertain” as it had a number of blind spots around shares.
It forecast receipts to reach £20.3bn in the current financial year.
