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Adam Smith Inst - Abolishing Capital Gains Tax Could Boost UK Economy by £25 Billion
As outlined in new the existence of capital gains tax (CGT), which is the tax on the difference between the acquisition price of an asset, and its price on its realisation or sale, is actively harming the UK’s growth prospects. It is increasing the cost of capital, meaning that less of it is being invested in machinery and technology in the UK, reducing productivity and wages.
- Eliminating capital gains tax (CGT) in the UK could increase national income by 0.9% every year, according to new analysis by the Adam Smith Institute (ASI);
- This would amount to £25.08 billion in the 2024/25 tax year, equating to £1000 for every family in Britain;
- CGT is increasing the cost of capital in the UK, leading to lower investment, lower productivity, and lower wages and standards of living;
- It is also having a disproportionate effect on start-ups and small businesses, limiting innovation, job creation and entrepreneurship;
- Evidence from other countries such as Ireland, the USA, Australia, Sweden and Britain itself shows that increases to the rate of CGT actually decreases revenue, while cuts to the rate increases revenue;
- Creating a competitive tax regime is crucial for the UK to attract investors and high-net-worth individuals, support job creation, raise wages and increase productivity;
- Ahead of the Budget on the 30th October, the ASI is calling on the Chancellor to rule out an increase to CGT, and to instead put forward plans to abolish CGT altogether;
- The ASI advocates for a phased elimination of CGT, with immediate steps to raise allowances and target exemptions for small businesses and start-ups, and a complete abolition by 2028.
The negative impacts of this tax are greatest on high-risk investments, such as venture capital, and small businesses and start-ups. High rates of CGT discourage potential entrepreneurs from setting up businesses in the first place, reduce the quantity of resources available to high-risk start-ups and small, growing companies, and make it more difficult for start-ups to hire and retain highly skilled staff.
CGT also creates a ‘lock-in’ effect, where investors hold investments in place and wait for the tax to be lowered to sell them on. This means that capital stays in place, rather than moving to more productive uses.
As report author Peter Young highlights, the evidence from both the UK’s previous changes to CGT rates, and other countries, including the US, Australia, Ireland and Sweden, demonstrates that cutting CGT raises tax revenue and, vice versa, increasing CGT actually reduces tax revenue.
The ASI’s modelling reveals that eliminating CGT could increase national income by 0.9% every year permanently. This would amount to £25.08 billion in the 2024/25 tax year.
The paper presents a phased strategy to eliminate CGT:
- Phase 1 (Immediate Reforms by 2024): Increase the annual CGT allowance to £20,000, index capital gains to inflation, and set CGT to 0% for investments in start-ups, small private companies, and AIM-listed and FTSE fledgling companies;
- Phase 2 (Targeted Reductions by 2026): Reduce CGT on residential property to 15%, eliminate CGT for companies listed on the FTSE Small Cap index, and reduce CGT to 0% for assets held for over 4 years, with tapering starting after 2 years;
- Phase 3 (Complete Abolition by 2028): Fully abolish CGT to foster a more favourable investment environment and stimulate long-term economic growth.
Ollie Austen, entrepreneur and co-founder of Startup 2 Standup, a peer 2 peer community for business founders, said:
“What struck me most about this report is how it reframes the debate around capital gains tax as something that affects everyone, not just the wealthy. The reality is that the benefits of capital investment are widely distributed.
When businesses invest in productivity-enhancing technologies and processes, it leads to higher output, greater efficiencies, and ultimately, better pay for workers.
In other words, cutting CGT isn’t just about boosting profits for investors, it’s about creating the conditions for businesses—large and small—to thrive, and for workers to share in the rewards of that success.”
Peter Young, former Head of Research at the Adam Smith Institute and author of the paper, said:
“Our economy is on the wane, growth is anaemic at best, our capital markets are dying, and productivity is sharply declining in global terms. Scrapping CGT is a key part of the radical action required to attract investment and jump-start economic growth. Moreover, It can be done without a big hit to tax revenue. What’s not to like?”
Maxwell Marlow, Director of Research at the Adam Smith Institute, said:
“Taxes on capital remain some of the most economically destructive and disruptive interventions a government can make. The pernicious capital gains tax in particular has all sorts of negative impacts on the economy, from stifling entrepreneurship and innovation, to keeping productivity- and workers’ wages - low.
We urge the Chancellor to outline steps to scrapping capital gains tax altogether at the next Budget. This would be a pro-growth, pro-business move that would pay for itself through enhanced economic growth and investment.”
Notes to editors:
Peter Young is the former Head of Research at the Adam Smith Institute, for which he has written a number of reports on tax policy.
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