They should Rename Capital Gains Tax, Inflation Tax

Now that capital gains tax (CGT) is mostly just a tax on inflation not real capital gains, perhaps it should be renamed “inflation tax”?

We know our government is short of cash. When was it ever not?

The state’s debt burden is now a little over £2,540 billion or to put it another way, 101 per cent of the nation’s output.

In the scheme of tax overall, capital gains tax is a minor tax really, accounting for no more than a still cool £18bn of the total tax take, but the amount coming from this source is rising very fast. Ten years ago, it was “just” £4bn.  The forecast of the government’s spending watchdog is that it will hit £26bn in 2027/8.

And in recent years, the Chancellor has halved the amount of realised gains that can be offset against a CGT liability from £12,300 to £6,000 for the current tax year, but also that he will halve it again to £3,000 for 2024/5.

To make matters worse, this is happening at the same time as inflation has increased hugely in recent years – and now looks to be embedded in for quite a lot longer than most economists (though not me) had predicted.

So, in effect anyone with capital gains is paying tax on “profits” that don’t really exist whenever they sell an asset. Most of the tax they are paying is tax on inflation.

Capital gains tax has effectively become a wealth tax in all but name.

In fact, it is not just the wealthy who pay capital gains tax. For the last year for which the data is available, (tax year ending April 2021), basic rate taxpayers made up 37 per cent of those who paid CGT.

Back in the old days things were very different indeed.

There used to something called indexation relief where one only paid capital gain tax on gains that were in effect in excess of inflation. Far fairer, far simpler.

But then under Tony Blair in 1998, this was scrapped. He said indexation was unnecessary in the low inflation of that time, when prices were rising at around just 3 per cent, and that it was a “complicating factor”.

This was a lie because just the following year, his Chancellor, Gordon Brown bought in a far more complicated system called taper relief, which was designed to reward people and businesses who held assets for longer, not Spivey dealers and day traders.  

This was then scrapped in 2008 in favour of no relief at all – no indexation, nothing at all, nada. But as a sort of compensation for that, capital gains tax was now to be charged at just 18 per cent, lower than standard income tax rates.

That lasted for a short time, until the basic rate of capital gains tax was pushed up to 28 per cent for all residential property other than one’s main residence, and to 20 per cent for everything else.  

Somewhere along the way, landlords also lost Private Letting Relief – another great and under-appreciated tax break – as well as being clobbered for a higher rate of Stamp Duty Land tax and of course, the deepest cut of all, the infamous Section 24.

And the government wonders why there is something of a trend for landlords to sell up and exit buy to let and why many people see this as a Conservative government in name only.

With inflation rising and many more people paying CGT on “gains” that are not gains, but which are purely the result of inflation, all investors in assets, not just landlords, now need a fairer system that again takes account of inflation – and the “complicating factor” lie of the Tony Blair era needs to be reversed.

Failing to do this will only see investment of all sorts decline further, but especially in buy to let, where the rate of capital gains tax is highest. Just don’t hold your breath waiting.


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