Despite Labour’s recent love-bombing of the business community, its manifesto, released on 13th June, firmly aligned itself with “working people”, pledging to fund its policies through taxes targeted only at the wealthy.
Revenue-raisers include closing non-dom tax loopholes (£5.2bn), reducing tax avoidance, applying VAT and business rates to private schools (£1.5bn), closing the carried interest tax loophole enjoyed by private equity managers (£565mn), and imposing a windfall tax on oil and gas giants.
Not too controversial, you might think. Indeed, the Institute for Fiscal Studies goes so far as to say that the promised public service spending increases are “tiny, going on trivial”, and the tax rises “even more trivial”.
But the manifesto will be scrutinised as much for its omissions as its explicit policies, and one glaring elision is Capital Gains Tax (CGT) – the tax levied on the profit when assets that have increased in value are sold.
No mention of Capital Gains Tax in Labour’s manifesto
Labour has been curiously coy in its attitude to CGT over the past few months, raising suspicion that it could be a recourse further down the line if it needed to raise revenue.
For example, on 9th June, Starmer told the Guardian that he couldn’t rule out needing to raise CGT in the future: “I’m not going to write five years’ worth of budgets three and a half, four weeks before an election.
“But I am going to say we’re fully costed, fully funded, and that none of our plans require tax rises over and above the ones we’ve already set.”
The problem, however, is that Labour’s big manifesto promises – of more hospitals, of drastically reduced NHS waiting times – will require big spending.
“We shouldn’t be surprised if whoever is Chancellor after the election announces some tax rises that were not in the manifesto – at least that’s what the history of previous post-election budgets tells us,” says Carl Emmerson, Deputy Director of the Institute for Fiscal Studies (IFS). “We often see pretty chunky tax rises in the first year of a parliament.”
Indeed, the IFS has spoken of a “conspiracy of silence” between the two major parties regarding tough decisions about tax rises, as they seek to corner the business vote, as well as that of the ordinary citizen.
Only the Liberal Democrats have openly pledged to raise CGT, proposing a new 40% rate for gains of between £50,000 to £100,000, and 45% for gains over £100,000. From this Lib Dem leader Ed Davey says that £5bn could be raised.
The Lib Dems’ proposal represents a major reform of the current regime: at present, CGT is levied at a variety of rates ranging from 10% to 28% depending on the asset class and the taxpayer’s income.
Labour has boxed itself in with promise of no tax rises for “working people”
Labour’s “big three tax” pledge, which promises no income tax, national insurance and VAT rises, three of the largest sources of revenue, leave it with very little “wiggle room” to raise money if needed. The party has also boxed itself in by promising to cap the rate of corporation tax at its current rate of 25% for the period of the next parliament.
Having already allocated a hefty £17.5bn in borrowing to finance the green prosperity plan, Labour is relying on economic growth to fund any additional spending that is not currently accounted for in their plans.
Paul Johnson, Director of the IFS, says: “This is a manifesto that promises a dizzying number of reviews and strategies to tackle some of the challenges facing the country. That is better than a shopping list of half-baked policy announcements.
“But delivering genuine change will almost certainly also require putting actual resources on the table. And Labour’s manifesto offers no indication that there is a plan for where the money would come from to finance this.”
And if economic growth doesn’t deliver the hoped-for revenue, Labour will face a difficult choice: either increase taxes or proceed with spending cuts that will face significant public opposition. The former option looks most likely, with CGT, inheritance tax and the tax-preferential treatment of pension savings, as the easiest targets.
“Labour’s manifesto offers no indication that there is a plan for where the money would come from to finance [genuine change].” – Paul Johnson, Director of the IFS
Global and domestic push to increase CGT rates
Shadow chancellor Rachel Reeves has already been under pressure from members of her shadow cabinet to raise CGT in her inaugural autumn budget if Labour is elected on 4th July, according to CityAM.
However, it is not only domestic pressure that Reeves will have to contend with. Across the pond, the US’ Joe Biden and Canada’s Justin Trudeau have proposed hiking taxes on capital gains to fund their policy initiatives and address wealth inequality.
Biden has proposed doubling the long-term CGT rate for high-income earners to 39.6%, while Trudeau has suggested increasing the taxable portion of capital gains for companies and individuals with annual investment profits exceeding C$250,000 from one half to two-thirds.
Only a few days ago, the International Monetary Fund (IMF) also weighed in, urging governments to raise CGT rates to support workers in the face of an AI-driven transformation of the job market. An IMF report, published on Monday (17th June), says “a supplemental tax on excess profits, stronger taxes on capital gains, and improved enforcement” should all be considered.
An uncertain outlook
The outlook remains uncertain, but the prospect of CGT rises in Labour’s inaugural autumn budget ought to serve as a catalyst for entrepreneurs’ exit strategies.
If CGT were brought in line with income tax, business owners could face significantly higher tax bills when selling their shares, eroding the rewards of their hard work and investment.
With Labour holding a significant lead in the election polls, entrepreneurs should get the ball rolling on their exit strategy as soon as possible if they want to lock in the current CGT rate.