Plans to align the UK’s Income Tax and Capital Gains Tax rates would represent a fundamental shift in the tax system and could discourage investment, according to Sean Drury, head of tax at Blick Rothenberg.
Speculation over aligning the two systems has intensified, but Drury argues that treating capital gains in the same way as income would overlook important differences between the two forms of taxation.
The taxation of realised gains — when an asset is converted into money or money’s worth — has developed over centuries. By contrast, taxing unrealised gains or asset values falls broadly within the concept of wealth taxation.
Drury argues that countries have generally maintained lower Capital Gains Tax rates because investment returns are affected by inflation, while capital committed to assets is exposed to risk and cannot be deployed elsewhere.
Across the G7, tax rates on assets held for more than a year generally range between 20 and 30 per cent, broadly in line with the UK’s current system.
One rationale for lower capital gains rates is to avoid the complexity of calculating the inflation-adjusted value of long-term investments. Capital invested in businesses may also have already been subject to income taxation, making higher taxes on subsequent gains a potential deterrent to further investment.
The UK’s experience in the 1980s illustrates the difficulties. Nigel Lawson aligned Income Tax and Capital Gains Tax, but the resulting system required increasingly complex mechanisms, including indexation allowances, share rebasing and separate pools.
Those measures eventually gave way to taper relief and, ultimately, a simpler system designed to recognise inflation through lower rates.
The scale of the tax base has also changed dramatically. About 68,000 people paid Capital Gains Tax in 1979, compared with 584,000 in 2025, according to the figures cited by Drury.
“Centuries of global experience for market driven economies has led to a broad principle of a simple system of Capital Gains at approximately half of the Income Tax Rate – we should remain absolutely within that pack,” he said.
He warned that alignment could cause investors to delay realising gains, reducing liquidity while they waited for greater clarity over future tax policy.
“Our biggest issue and our route to salvation has to be increasing the wealth of the entire country proportionately through growth and productivity,” Drury said.
“Tax policies should promote this front and foremost, aligning Capital Gains Tax will hamper investment and directly restrain growth – it is basic maths.”
The principal beneficiaries of greater complexity, he argued, would be tax advisers, as new rules to account for inflation, asset differences and reliefs recreated a system that previous reforms had sought to dismantle.
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