Labour’s ‘dilemma’: Will Rachel Reeves raise Capital Gains tax?

In brief...

• Rachel Reeves has refused to rule out a rise in Capital Gains and inheritance taxes, following a confession on The News Agents that Labour may need to raise taxes in the October budget.
• The party promised no tax rises for working people, but says it found a £22 billion deficit when it took power from the Conservatives.
• The News Agents say this sends a mixed message to the EU, and the rest of the world, about the country's financial priorities.

What’s the story?

We heard it all through Labour's election campaign – there were no plans to raise taxes for working people, no matter how many times the Conservatives insisted that was the intention.

But Labour was very specific in its statements in the lead up to the July election. It promised it wouldn't raise income tax, national insurance or VAT, the taxes that would hit working people the hardest.

Since then, Keir Starmer and Chancellor Rachel Reeves have spoken about a previously unknown £22 billion deficit the Labour government inherited from the Conservatives, and their tone has changed.

“I think that we will have to increase taxes in the budget”, Reeves told The News Agents in July, although she has consistently refused to comment on which taxes could see a hike.

The Prime Minister struck a sombre tone on Tuesday, when he addressed the country from the Downing Street garden, telling reporters "things will get worse before they get better".

Reeves has now refused to rule out raising Capital Gains tax or inheritance tax in the October budget, avoiding answering a direct question on her intentions on the matter three times.

The News Agents describe it as one of the "few wealth levers" available to the government to improve the UK's financial standing.

What is Capital Gains tax?

Capital Gains tax applies when you "dispose" of an asset that has increased in value since you first purchased it. This can be anything you own that's worth more than £6,000, although you only pay tax on the amount it has increased by – the amount you paid originally is deducted from the taxable figure.

The rate is charged at 10% or 18% – depending what tax bracket you fall into.

"Disposing" of an asset can include selling it, exchanging it, giving it away or destroying it.

It can apply to second homes, your main home if it's been used for business or is very large, or shares and other business assets. There are some exceptions, such as your car.

What is inheritance tax?

This is the tax you pay on property, money or possessions you inherit from someone who has died, and it is set at a rate of 40%, with a tax-free threshold of £325,000.

Again, there are exceptions – such as if you leave your assets to your spouse, civil partner, a charity or an amateur sports club, and if you leave 10% to a charity, the tax rate drops to 36%.

Who does this affect?

Capital Gains tax is something that tends to affect mostly high-earners or the very wealthy.

Inheritance tax will apply to more people, but only when they inherit assets after someone dies.

What's The News Agents' take?

Lewis Goodall says it's easy to see "good reason" to raise Capital Gains tax, among others, but suggests it could leave Keir Starmer and the Labour government in a sticky situation when it comes to its international standing.

He has spoken continually – before and after the election – about how "wealth creation" is his number one priority as Prime Minister. Today (28 August), he spoke in Berlin about (among other things) delivering economic growth in the UK and Germany.

This might seem, to some, at odds with any plans to penalise the wealthy in the UK.

"You can make an argument to say that increasing it at a time when you are trying to say to the world that Britain is open for business and we want investments is a pretty muddled message," says Lewis.

"If you're increasing capital gains tax – which is basically a tax on wealth and profits – then how can you be at the same time saying that your number one objective is wealth creation."

Jon Sopel says Labour's election manifesto, in which they made firm promises not to raise taxes, could now prove a stumbling block for the government.

"It's a dilemma that they want to have investors, they want to encourage entrepreneurialism, but they need to raise cash," he says.

"And so many of the obvious ways to raise cash have been ruled out because of the way they framed their manifesto."

Listen in full on The News Agents.