Capital gains tax paid by small share of UK population, research shows

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Capital gains in the UK are highly concentrated in a small and wealthy set of parliamentary constituencies, suggesting most voters would not be hit by higher taxes on the profits, according to research. 

Less than 3 per cent of UK adults paid capital gains tax over the decade up to 2020, a paper from the University of Warwick and London School of Economics showed.

More gains were received by residents in a part of Notting Hill in London than in Liverpool, Manchester and Newcastle combined, the research showed.

The report, based on anonymised tax records, highlighted that capital gains were hugely concentrated both regionally and in terms of household incomes.

The findings suggest that UK politicians could boost levies on capital gains without adversely affecting most of the population. Opponents of higher capital gains tax argue such a move would discourage investment.

Just 0.3 per cent of people with income under £50,000 had taxable gains in an average year, the report said. By contrast, almost 40 per cent of taxpayers with incomes over £5mn received some gains.

 “The striking thing is so few people pay it,” said Arun Advani, an associate professor at Warwick and one of the study’s authors. “It is not a mass-market tax.” 

More than half of all taxable gains in 2020 went to just 5,000 people, who received an average of more than £6.8mn per person in gains, according to the report entitled “Who would be affected by Capital Gains Tax reform”.

While CGT can arise on a range of assets, the researchers found that 70 per cent of gains were from business assets.

Both main UK political parties are struggling to show how they can curb the country’s mounting government debt burden and improve public services without announcing hefty new tax rises after the general election.

Jeremy Hunt, the Conservative chancellor, said in 2022 he would reduce the amount of capital gains that are tax-free as he sought to reduce the budget deficit while leaving the rates unchanged. 

Labour’s shadow chancellor Rachel Reeves has pledged not to lift capital gains tax, or a host of other taxes, despite demands from some trade unionists for wealth to be taxed more heavily. 

Capital gains tax rates range from 10 per cent to 28 per cent. Income tax rates in England, Wales and Northern Ireland are 20 per cent, 40 per cent and 45 per cent. 

Britons paid a record £16.7bn in capital gains tax in the 2021-22 financial year on the back of rising asset values. A capital gain arises when an investment is sold for more than its purchase price.

“Continuing to tax these gains at a lower rate than earnings from work is the complete opposite of ‘levelling up’,” said study co-author Andrew Lonsdale, research officer at LSE’s International Inequalities Institute.

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