Rachel Reeves is considering raising capital gains tax as high as 39% in the budget, the Guardian can reveal, amid a scramble to raise funds for crumbling public services.
Treasury modelling being reviewed by the chancellor and seen by this newspaper shows officials are testing a range of 33% to 39% for capital gains tax (CGT).
The wealth tax is paid by about 350,000 people and is levied on the sale of assets including second homes and shares but at significantly lower rates than wages.
Whitehall sources say there is growing concern about the limited options for tax rises to fill a hole the Institute for Fiscal Studies (IFS) thinktank says is as big as £25bn, ahead of the budget on 30 October.
“Some very big tax decisions are being left until very late in the day,” one senior source claimed. Another said the Treasury’s tax-raising plans were in “complete disarray”.
Reeves and Keir Starmer have repeatedly pledged not to raise taxes for “working people”, ruling out increases in income tax and national insurance.
But with plans for other wealth taxes in tatters, Whitehall officials and ministers are concerned that time is running out to find ways to raise money.
Officials have already warned Reeves that plans to target non-doms and private equity bosses may not raise any money, or could even cost the exchequer revenue, as wealthy individuals flee the UK.
A Treasury spokesperson denied suggestions of “disarray”. “These claims are inaccurate,” they said, adding that they did not comment on “pure speculation” regarding specific tax measures before a budget.
Sources said plans for big increases in CGT and inheritance tax (IHT) were also at risk of unravelling, as officials raced to present fresh modelling to the government’s spending watchdog, the Office for Budget Responsibility (OBR), in time for it to check Treasury figures.
Recent Treasury modelling shows Reeves is considering raising higher rates of CGT and has asked the OBR to assess how much money could be generated from a range of between 33% and 39% levied on second homes, for example.
Under the current system, profits from the sale of second homes at up to 24% or shares in businesses, up to 20%, are taxed at a much lower rate than wages, which are taxed at up to 45%.
The move would not go as far as CGT rates mirroring those of income tax, as some Labour MPs have called for.
Internal documents laying out the modelling note that it is hard to predict how people will respond to higher taxes on capital gains, and present an array of scenarios for different levels. Only about 350,000 people a year pay CGT, but they contribute about £15bn per annum in tax receipts, according to IFS figures.
At the lowest end of a possible increase – if 28% were to move to 33% for instance – a few hundred million pounds could be raised for the exchequer, the modelling suggests. Increasing CGT to the middle of the range across different classes of assets could raise about £1bn, it shows.
In the more extreme scenario, such as hiking it to 39%, then the annual amount raised by CGT could actually fall after five years. Many of the findings of the Treasury modelling echo research produced by HM Revenue and Customs in June.
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At present, top rate taxpayers must pay 24% on gains from residential property that is not their main home, 28% on gains from “carried interest” if they manage an investment fund, and 20% on gains from some other assets, according to government guidance. Rates for lower rate taxpayers are less.
Wealth managers have reported a flurry of investors rushing to sell second homes and other assets before the budget, after the Guardian revealed in June that the chancellor was considering raising CGT rates. This is likely to lead to a temporary bulge in tax receipts.
Reeves’s tax-raising plans have come under increasing attack, with Starmer on Wednesday repeatedly refusing to say whether Labour plans to levy national insurance on employers’ pension contributions. The IFS suggested doing so could raise about £17bn a year.
But bosses have warned of “unintended consequences” from such a move, warning it would hike their wage bills and put companies off topping up staff pension pots.
Economists are concerned that raising the rate of CGT without a wider overhaul of its complex structure could fail to have the desired revenue-raising effect in the long term.
“The government should seek to make [CGT] reform credibly lasting. It should set out clear principles and a rationale for reform and commit to the new regime for the length of the parliament. Instability and unpredictability are bad for investment,” the IFS said in a tax policy paper released last week.
The Guardian understands that the chancellor has ruled out adopting any tax measures that would leave the country worse off in her budget.
The Treasury was given multiple opportunities to comment on detailed points regarding the internal modelling well ahead of publication but did not dispute them.
However, after publication it changed its position to say: “This reporting is not based on government modelling – we do not recognise it. This is pure speculation.”