Submitted by Bill Fernie
6th September 2026
Capital Gains Tax is one of those taxes that can produce an argument almost before the first sentence has been completed.
For some people, it is an obvious loophole in the tax system. Why should somebody earning money from selling shares, a second property or a business sometimes pay considerably less tax than somebody earning the same amount through employment?
For others, Capital Gains Tax is already high enough. Increasing it further could discourage investment, encourage people to hold on to assets rather than sell them and, in the most extreme cases, encourage wealthy taxpayers to move themselves or their investments elsewhere.
Both arguments contain some truth.
The problem is that the debate is often reduced to a rather simplistic question: should Capital Gains Tax go up?
The better question is whether Britain's whole system of taxing capital gains makes sense.
At present, an individual generally pays Capital Gains Tax at 18% or 24%, depending on their circumstances and the type and size of the gain. There is also an annual tax-free allowance, although that has been reduced substantially in recent years. From April 2026, the main rates remain 18% and 24%.
That immediately creates a potential problem.
Someone can work for years, receive a salary and pay income tax and National Insurance on their earnings. Another person can build up wealth through investments and eventually realise a substantial capital gain which is taxed under a different system.
There are perfectly good reasons for treating the two differently. Investment involves risk. Someone putting their own money into a business or investment can lose it. Taxing the reward for taking that risk in exactly the same way as a salary is therefore not necessarily sensible.
But the difference has become large enough to create opportunities for people to organise their financial affairs around the tax system.
And that is where the argument becomes much more interesting.
Raising the rate is not necessarily the answer
It would be tempting for a government looking for additional revenue simply to increase the rate.
But Capital Gains Tax does not behave quite like income tax.
If an employee receives a pay rise, the additional income is normally taxed in the year it is received. With a capital gain, the owner has considerably more control over when the gain becomes taxable because, in many circumstances, they can decide when to sell.
That creates a powerful behavioural effect.
Suppose somebody has made a £1 million gain on an investment. If the tax rate rises significantly, they may decide not to sell. They might wait for a more favourable tax environment, transfer assets in a different way, or structure their affairs differently.
The government therefore cannot assume that a 10% increase in the tax rate will produce 10% more revenue.
In fact, the Treasury has already seen how changes in Capital Gains Tax can influence the timing of disposals.
That makes CGT a particularly uncertain source of revenue. It can produce billions for the Exchequer, but receipts can move sharply depending on asset prices, economic conditions and taxpayer behaviour.
The latest HMRC statistics demonstrate how important the tax has become. CGT raises substantial sums, but the number of people paying it remains relatively small compared with the number paying income tax. The tax is also heavily concentrated among those making very large gains.
That concentration is both an opportunity and a warning.
It means the government can raise significant sums by taxing a relatively small number of very large gains.
But it also means that if those taxpayers change their behaviour, the expected revenue can disappear surprisingly quickly.
[bb]So should we simply leave things alone?[/b]
That is where the argument for reform becomes much stronger.
The Institute for Fiscal Studies has argued that Capital Gains Tax needs more than occasional adjustments to its rates and allowances. It points to several structural problems, including the fact that accumulated gains can effectively escape CGT when assets are passed on at death.
That creates a curious situation.
Imagine someone buys an asset for £100,000 and it eventually becomes worth £1 million. If they sell it during their lifetime, there may be a substantial taxable gain.
But if the asset is held until death, the treatment can be very different.
There is therefore an incentive to hold on to assets rather than sell them, even when selling might otherwise make economic sense.
The IFS argues that this distortion should be addressed as part of a wider reform. It also argues that, once the tax base has been redesigned, the rates applying to different forms of income and gains could be brought closer together.
That is a much more complicated proposition than simply announcing a higher CGT rate.
But there is another side to the argument
There is a danger in assuming that every pound of capital gain is simply money that somebody has acquired without effort and therefore ought to be taxed as heavily as possible.
Britain needs investment.
Small businesses need people prepared to risk their savings. Entrepreneurs need a reason to build companies rather than simply take a well-paid job. Investors need confidence that the rules will not continually change.
Someone who builds a business over 20 or 30 years may eventually sell it and receive a large capital gain.
It would be wrong to assume that person is simply a wealthy investor looking for a tax break.
They may have created jobs, employed people, paid business rates, corporation tax and income tax, supported suppliers and spent decades taking risks that could just as easily have ended in failure.
That is why a sensible CGT system needs to distinguish between productive investment and tax avoidance, rather than treating every capital gain as though it were identical.
There is also the problem of inflation.
If someone bought an asset for £200,000 and eventually sold it for £300,000, the apparent £100,000 gain is not necessarily £100,000 of real economic gain. Some of the increase may simply reflect the declining purchasing power of money.
Taxing the inflationary element can make the tax system look fair on paper while producing some decidedly odd outcomes in practice.
The real question is what Britain wants its tax system to achieve
There is a perfectly reasonable argument that people receiving similar economic rewards should face broadly similar tax treatment.
There is an equally reasonable argument that investment and entrepreneurship deserve some recognition because they involve risk and can generate economic growth.
The answer probably lies somewhere between the two.
Instead of repeatedly changing the headline CGT rate, Britain could look at the system as a whole.
It could consider whether gains caused purely by inflation should be treated differently. It could examine the rules surrounding assets held until death. It could look again at the special treatment available for certain business disposals. It could consider whether investment that genuinely creates new businesses and employment deserves different treatment from passive speculation.
And it could simplify the system so that people do not need expensive professional advice simply to understand how much tax they will eventually pay.
That could actually produce a more efficient tax system without necessarily producing a permanently higher tax rate.
There is also a question of fairness
This is perhaps the most uncomfortable part of the debate.
Britain has become a country where wealth accumulated through property and investments can be vastly more important to some households than income from employment.
A younger worker may be paying tax on every pound of additional salary while watching somebody with substantial assets accumulate wealth through rising property or investment values.
That does not automatically mean the investor should be taxed at the same rate as the worker.
But it does make it reasonable to ask whether the tax system is giving too much advantage to wealth compared with work.
The IFS has highlighted the fact that returns to wealth are generally taxed less heavily than labour income and that wealth is considerably more unequally distributed than income.
That does not settle the argument.
But it does mean that simply saying "higher CGT will drive investors away" is not enough either.
There are choices to be made about what sort of economy Britain wants.
And there is one final warning for the Treasury
Capital Gains Tax should not become the government's answer every time it needs another few billion pounds.
The UK already has a very large tax burden and the tax system is becoming increasingly complicated. The IFS estimates that total UK tax revenue is set to reach a record share of national income in the coming years.
There is therefore a difference between reforming a badly designed tax and simply using a tax as another revenue-raising lever.
The first can make an economy work better.
The second can eventually make people change their behaviour in ways the Treasury did not anticipate.
Capital Gains Tax is particularly vulnerable to that problem.
So should it rise?
Possibly.
But simply increasing the rate and assuming the money will roll into the Treasury would be a remarkably crude approach.
Britain has an opportunity to do something more intelligent.
It could design a system in which genuine investment and entrepreneurship are still rewarded, but where somebody cannot obtain a substantially lower tax bill simply because their income happens to arrive in the form of a capital gain rather than a salary.
That would mean looking at the tax treatment of investment, property, businesses, inheritance and inflation together rather than changing one percentage figure in isolation.
And perhaps that is the question taxpayers should really be asking when the next Capital Gains Tax debate arrives:
Are we trying to raise more tax, or are we trying to build a better tax system?
There is a very big difference between the two.