Wealthy households could be in line for tax rises to claw back the cost of extra spending during the coronavirus pandemic, after the government called for a wide-ranging review of capital gains tax.
Rishi Sunak surprised backbench Tory MPs after he ordered the examination of the main tax on asset sales, which reaps billions of pounds for the exchequer each year on the sale of second homes, works of art and stocks and shares.
Analysts said the chancellor’s review could open the door to higher taxes for the wealthy over the rest of the current parliament.
The request followed a report by the Office for Budget Responsibility that highlighted how the growing deficit in government spending was likely to exceed £350bn this year as the costs of protecting businesses and households during the pandemic spiralled higher.
The OBR, which is the Treasury’s independent economic forecaster, said the government would come under pressure to fill the shortfall with tax rises or spending cuts to bring the government finances back into balance.
It said the Treasury was likely to suffer steep falls in capital gains tax (CGT) receipts over the next two years as property and other assets slump in value, adding further pressure on Sunak to increase tax rates to fill the gap.
Tory MPs are expected to push back against any tax increases for households that have accumulated wealth, claiming that middle income families are unfairly taxed on modest gains under the current system.
Treasury officials played down the scope of the review, saying it was a follow up to a review of inheritance tax last year that had yet to be acted on.
The Treasury said: “This is standard internal working. There is no expectation or plans for policy changes as a result.”
However, Sunak said he wanted the Office for Tax Simplification (OTS) to examine the way people who sell second homes, works of art and stocks and shares can escape paying tax on their gains.
Tom Selby, senior analyst at the financial adviser AJ Bell, said: “With UK borrowing set to hit its highest level in peacetime history, Sunak’s request for a review of CGT feels like the starting pistol for a tax grab ahead of the Autumn budget later this year.”
Sunak is known to be concerned that households are able to drive down their CGT tax bills using a variety of avoidance measures. While the top rate of income tax is 45% and 40% for earners over £50,000, Selby said the average CGT paid on the sale of assets was 15%.
A shift to align CGT and income tax rates, which would be supported by Labour, could simplify the system and raise tax revenue – “particularly if the annual exempt amount, currently set at £12,300, is either slashed or abolished altogether”, Selby said.
Last year, the OTS put forward plans to streamline inheritance tax rules to limit the number of exemptions. It kept in place current generous tax thresholds, which allow up to £1m to be passed on tax-free. The report has yet to be acted on.
Sunak said: “This review should identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent.”
Nathan Long, a senior analyst at the stockbroker Hargreaves Lansdown, said: “We could be seeing the tips of the government’s fingernails, as it considers how to claw back the enormous sums spent on bailing the economy out of the Covid-19 crisis.
He added: “It would be naive to assume the chancellor didn’t have his eye on tweaking taxes to refill his coffers. Given the vast sums of tax-payers’ money being poured into the economy to fight the effects of the coronavirus crisis, it’s bound to feature in his thinking.”