John Healey reportedly rejects capital gains tax alignment

John Healey has reportedly ruled out bringing UK capital gains tax rates into line with income tax ahead of the 28 October Budget, rejecting a proposal that supporters say could raise £14bn.

The decision, reported by City AM, follows warnings that higher rates could discourage investment, prompt wealthy individuals to leave Britain and lead asset owners to postpone sales. The Treasury has not confirmed the position, saying tax decisions will be announced at fiscal events.

What happened

Several senior cabinet ministers have pressed in recent months for capital gains tax, or CGT, to be charged at the same rates as income tax. Healey is understood to have rejected that approach internally, despite pressure from within Labour to use the Budget to increase revenue.

Most gains on assets including shares, investment funds and residential property currently attract CGT at rates of 18% or 24%. The proposals discussed would have aligned those charges with income tax rates of 20%, 40% and 45%.

The distinction matters to the revenue debate. A higher tax rate does not necessarily produce a corresponding increase in receipts if investors change when they sell assets or where they live. One person cited in the reporting warned that those responses could leave the Treasury collecting less rather than more.

The reported rejection concerns alignment with income tax. It does not amount to a published Budget decision on every aspect of CGT, and the Treasury's response gives no confirmation of which measures remain under consideration.

The background

Healey faces pressure to find additional revenue for his first Budget as higher interest rates and defence spending weigh on the public finances. Economists believe the £23.6bn of fiscal headroom recorded in March has diminished following the conflict in the Middle East.

The Institute for Fiscal Studies warned on Sunday of a £35bn gap in the government's spending plans. That estimate frames the search for revenue, alongside the wider debate over the UK economic outlook ahead of the Budget.

The argument within Labour is not confined to the Treasury. Support for moving CGT closer to income tax has come from senior ministers, allies of the prime minister and a former party leader, making the issue a test of competing approaches to raising money.

Business groups and companies are also seeking changes in the opposite direction. Marks & Spencer and John Lewis have pressed for Budget tax relief, illustrating the competing demands surrounding the fiscal statement.

What people are saying

Centax, a left-leaning think-tank, has previously estimated that aligning the taxes could bring in £14bn. The Institute for Public Policy Research, which has several former staff members serving as ministers, has also strongly supported the proposal.

Those positions contrast with concerns among investors, financial advisers and business leaders about Britain's attractiveness as a place to hold and invest wealth. Their objections focus on the risk that a substantial increase would encourage departures from the UK rather than deliver the expected receipts.

Anna Macdonald, investment strategy director at Hargreaves Lansdown, said another significant CGT change would disadvantage investors and discourage investment in the domestic stock market. In its warning against a capital gains tax rise, the investment platform also pointed to Treasury projections as evidence that an increase could prove counterproductive.

Shadow chancellor Andrew Griffith welcomed the reported retreat but argued that speculation about tax rises had already undermined economic confidence and affected jobs. He called on Healey to rule out further increases and address welfare spending instead, citing the existing tax burden.

The Treasury declined to address the individual proposals. Its spokesperson maintained that the chancellor would set out tax policy through fiscal announcements rather than respond routinely to speculation.

What happens next

The Treasury is reportedly developing capital gains relief proposals aimed at entrepreneurs who sell their businesses and reinvest in the UK. That would put the emphasis on encouraging the proceeds of business disposals to remain invested domestically, rather than applying income tax rates to gains.

No relief rate, eligibility criteria or implementation timetable is given in the report. Business owners considering a sale therefore do not yet have published terms against which to assess the reported proposal.

The 28 October Budget is the scheduled point for Healey to set out his tax decisions. Until then, both the reported rejection of full alignment and the work on reinvestment relief remain distinct from formally announced policy.