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Labour has refused to rule out an increase in capital gains tax, sparking warnings that a hike could deter investors from the UK and push entrepreneurs to sell businesses.
The focus on capital gains sharpened on Monday after Labour declined repeatedly to exclude such a move and the Liberal Democrats put a £5.2bn CGT increase at the heart of their manifesto.
Brent Hoberman, executive chair of Founders Forum and former chief executive of Lastminute.com, told the Financial Times that increasing CGT was a “populist trap”.
“If we have policies that are globally uncompetitive, it will cost us more and the country will have to find other ways to pay for the NHS etc,” he said.
Labour, which is about 20 points ahead of the Conservatives in opinion polls ahead of the July 4 general election, has committed not to raise income tax, national insurance, corporation tax or VAT. The party has worked hard to reassure companies and the electorate that it will offer business-friendly policies.
Capital gains on assets including businesses, second homes and shares are taxed at between 10 and 28 per cent — much less than income tax rates, which range from 20 to 45 per cent.
Hoberman said that while taxing gains at a lower rate than income might sound unfair, the UK had to compete with other countries to attract “wealth creators”.
Sir James Wates, chair of the Institute for Family Business and former chair of Wates Group, one of the country’s biggest family-owned companies, said: “The whole thing about capital gains tax is it becomes a disincentive to growth, and the Labour party has said how important growth is.”
Faced with a tight fiscal backdrop, Labour is looking to boost private investment to kick-start the UK’s sluggish economy.
The lower CGT rate has been criticised by some as an incentive to game the system by classifying ordinary income as a gain.
Helen Miller at the Institute for Fiscal Studies said there would be benefits to overhauling CGT but that this would require a bold set of reforms.
“If you just fiddle, you won’t get much money and risk doing things that are bad for investment. If you think about the design of capital gains tax, there is a bigger prize to be had.”
Andrew Jeffs, partner at Cavendish who advises people selling their businesses, said that clients had so far not been concerned about a potential rise in CGT under Labour.
But he warned that entrepreneurs were capable of changing their plans if they deemed the tax to be too high, pointing to a number of business sales before the March 2021 Budget when there was speculation that the Conservatives would increase CGT.
Countries such as Italy and Portugal offer attractive tax regimes for wealthy people while one client had moved to Israel, he said. “Entrepreneurs are hard to get. If they’re not happy to pay the amount of tax, they will do something else and there is a whole industry to support them doing that.”
Starmer told The Guardian on Monday that none of Labour’s spending plans required tax rises above the limited ones already set out, including those focused on non-domiciled residents, private equity bosses, private schools and oil companies.
Jonathan Ashworth, shadow cabinet minister, also refused to rule out a CGT rise. “Nothing in our plan requires additional tax to be raised,” he said.
Additional reporting by Emma Agyemang in Copenhagen and Emma Dunkley in London