John Healey has rejected calls to align capital gains tax with income tax ahead of the October 28 Budget, as the Treasury warns the move could drive investors overseas and undermine the revenue it is supposed to raise.
The Chancellor has slammed the door on one of Labour’s most contentious tax proposals, rejecting mounting pressure from senior party figures to bring capital gains tax into line with income tax as ministers scramble to fill a multibillion-pound hole in the public finances.
With the October 28 Budget looming, Treasury sources have made it clear that equalising the two taxes is off the table, a significant setback for campaigners who argue that taxing wealth more heavily could raise billions for the Exchequer.
The proposal had gathered momentum across Labour’s political and policy establishment, with prominent figures calling for investors and workers to face more comparable tax rates.
But the prospect of a sweeping overhaul has alarmed entrepreneurs, technology founders and City figures, who warn that higher taxes could push wealthy individuals to leave Britain or delay selling their assets.
One person close to the discussions dismissed the equalisation proposal as “batshit crazy”, while another warned that taxpayers would simply change their behaviour, potentially depriving the Government of the additional revenue it hopes to secure.
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Four people familiar with the matter confirmed that the proposal had been firmly rejected. The Treasury declined to comment.
The decision comes at a delicate moment for the Chancellor. The Institute for Fiscal Studies warned on Sunday that the Government faces a £35bn gap in its spending plans, as higher interest rates and mounting defence costs intensify pressure on the public finances.
The political temptation to find new revenue sources is clear. So, too, is the economic risk of pursuing a tax increase that could change the behaviour of precisely the investors and entrepreneurs ministers want to keep in Britain.
Higher-rate taxpayers currently pay 24 per cent capital gains tax on profits from asset sales, compared with a top income tax rate of 45 per cent. Supporters of equalisation argue that the disparity favours wealth accumulated through investments over earnings generated through work.
Louise Haigh, the first secretary of state, called for capital gains tax to be “brought closer to income tax rates” shortly before returning to government. Lord Neil Kinnock, the former Labour leader whom Prime Minister Andy Burnham has credited as a mentor, has also backed the proposal, as has Defence Secretary Wes Streeting.
Dale Vince, the entrepreneur and Labour donor, supported estimates suggesting that aligning the two taxes could generate £14bn for the Exchequer. The left-leaning Institute for Public Policy Research described the proposal as a “no-brainer”.
But campaigners see it as a potentially lucrative reform, while critics regard it as a threat to investment, entrepreneurship and the Government’s own growth ambitions.
Business leaders warn that capital is mobile, and tax decisions can influence not only where wealthy people live but also when they sell companies, realise investment gains, or commit money to new ventures.
Lord Jim O’Neill, who advised Mr Burnham before declining a role in government, said he would be “most disappointed” if ministers increased capital gains tax.
“That would pour more fuel on this idea that every other wealthy person is planning to move to Place X,” he said.
The comments reflect growing anxiety among business leaders that Britain risks reinforcing an already damaging perception that success will be met with increasingly punitive taxation. Even the prospect of a tax increase, they argue, could encourage some investors to consider alternatives before ministers have made a final decision.
The Chancellor’s rejection of full equalisation does not, however, amount to a guarantee that capital gains tax will remain untouched. A more modest increase has not been ruled out, leaving investors and advisers watching closely for signals about the direction of travel.
For the Treasury, the challenge is to raise revenue without undermining the investment and business activity on which future growth depends. That calculation becomes particularly sensitive when the Government is also trying to persuade entrepreneurs to build and scale companies in Britain rather than move abroad.
Instead of pursuing full equalisation, the Treasury is developing measures intended to encourage entrepreneurs to reinvest the proceeds of business sales into the domestic economy, according to three people familiar with the plans.
Business lobby groups including Tech Nation, Startup Coalition and Enterprise Britain have urged ministers to cut or defer capital gains tax liabilities for founders who reinvest their proceeds in British start-ups and scale-ups within a specified period.
The proposed approach would shift the emphasis from taxing gains more heavily to directing more private capital towards British businesses. Rather than treating the sale of a successful company as an opportunity to collect more tax, ministers would seek to make the proceeds a source of funding for the next generation of entrepreneurs.
“If the UK wants to keep founder talent and capital here, it needs to compete just as seriously,” Tech Nation said.
The distinction is important for a Government seeking both additional revenue and stronger economic growth. Taxing capital gains more heavily could raise money in the short term, but the final yield would depend on how investors responded. Relief for reinvestment, meanwhile, could support new businesses, although its ultimate cost and effectiveness would depend on the details.
City figures have also joined the campaign against increases. The chief executive of investment platform Hargreaves Lansdown is among those urging ministers to resist raising capital gains tax, adding to pressure from financial advisers and business groups concerned about the impact on investment decisions.
The argument is no longer simply about whether wealth should be taxed more heavily. It is about whether Britain can afford to make itself less attractive to the people and capital that ministers hope will drive economic expansion.
For the Chancellor, the stakes are unusually high. A £35bn fiscal gap leaves little room for complacency, while Labour’s own supporters are demanding a fairer tax system and business leaders are warning against measures they believe could drive investment away.
Full equalisation appears to have been ruled out. But the wider battle over how Britain taxes wealth, rewards entrepreneurship and finances public services is far from over.
As the Budget approaches, the Treasury faces a difficult balancing act: find the money without frightening away the capital needed to generate it.
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