UK Labour leadership debate revives capital gains tax alignment proposal

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Labour capital gains tax proposal

Highlights

Labour leadership candidate Wes Streeting proposes aligning capital gains tax with income tax rates, potentially raising an additional £12 billion per year for the Treasury.
Raising capital gains tax rates up to 40%-45% would make the UK highest in Europe, heightening concerns over capital flight after recent offshore trust exemptions were abolished in October 2024.
Recent and proposed UK tax measures including higher carried interest and dividend taxes, abolition of offshore trust exemptions, and a 'mansion tax' from April 2028 target wealthy taxpayers but face criticism on efficacy and administrative complexity.

Capital gains plan and fiscal rationale

As reported by CNBC, Streeting, the former health secretary, says a "wealth tax that works" should ensure returns from owning assets are not taxed less than earnings from work. In practice, his proposal is not a direct annual levy on wealth, but an alignment of capital gains tax with income tax rates.

Higher and additional rate taxpayers currently pay 40% or 45% on earnings, while capital gains above £3,000 a year are taxed at 24%, with first homes exempt, or 32% on gains from carried interest. Streeting cites analysis from the Centre for the Analysis of Taxation, a centre-left think tank, to argue that matching those rates could raise an additional £12 billion annually for the Treasury.

The idea is not new in British tax policy. Rachel Reeves backed a similar approach in a 2018 pamphlet, and Nigel Lawson aligned income tax and capital gains tax rates in 1988, saying the move improved neutrality in the tax system.

Risks, implementation hurdles and wider tax impact

A higher capital gains tax rate of 40% to 45% would be the highest in Europe, according to the article, and could intensify concerns that entrepreneurs and investors may shift wealth abroad. The text says Reeves is thought to have already contributed to that risk in October 2024 by abolishing Britain's tax exemption on offshore trusts.

Critics also argue capital gains have historically been taxed below income because part of the gain can simply reflect inflation rather than real appreciation. Chancellors have therefore introduced various reliefs and allowances over time, while supporters of lower rates also say many taxable gains come after risk-taking that benefits the economy through business creation and employment.

The article adds that the current government has already increased pressure on wealthier taxpayers through higher taxes on carried interest and dividends, alongside the offshore trusts change and a planned "mansion tax" from April 2028 on homes worth more than £2 million. Even so, while Labour members may still support a broader wealth tax, experience across Europe suggests such levies often raise less than expected and are difficult to administer, especially when private businesses, pensions and property require repeated valuation.

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