The UK government faces a £23 billion capital gains tax black hole after the Office for Budget Responsibility slashed its forecast for the next five years.
The downward revision comes just five months after the Chancellor announced an increase to the rates of CGT in the Autumn Budget, with a rise from 10% to 18% for basic rate taxpayers and 20% to 24% for higher rate taxpayers.
According to the OBR’s latest estimates, CGT is forecast to raise £13.3 billion in the 2024/25 tax year, 8.5% lower than the previous year and a downward revision of £2.4 billion from the October forecast.
By 2029/30, the OBR estimates that the Government will raise £25.5 billion in CGT but this is £5.5 billion below the £31 billion previously forecast.
AJ Bell said the updated forecast suggests the Government has underestimated the behavioural impact of tax hikes in the Budget.
Charlene Young, senior pensions and savings expert at AJ Bell, said: “The revisions likely reveal the unpredictable behavioural changes that can emerge when taxes change. The Laffer Curve illustrates the relationship between rates of tax and the amount of revenue the Government would receive. It suggests that increasing tax above a certain ‘sweet spot’ alters taxpayer behaviour to the extent that the revenue would go down.”
“Higher rates of capital gains tax might deter people from investing in growth assets in the first place, potentially depriving them of higher long-term returns, while at the same time undermining demand for the UK stock market. All of which form the foundation of the Government’s stated objectives.
“Likewise, we’ve seen that people will realise gains before an expected tax hike in order to avoid paying higher rates of tax. It’s equally possible some taxpayers will simply decide to sit on assets for longer, hoping to wait out today’s higher tax rates and realise gains on assets under a more accommodating tax environment in the future,” she added.
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