Healey to reject calls to raise capital gains tax in budget

John Healey is expected not to increase capital gains tax, despite earlier calls from senior Labour figures. The tax applies when people profit from selling assets that have risen in value. The decision matters because the budget needs revenue, but a higher rate might not produce the expected return.

Treasury sources say wealthy people could delay selling assets or move them abroad if capital gains tax increased. That would reduce the taxable transactions taking place in the UK. Healey therefore appears to have judged that a higher headline rate could ultimately cost the Treasury money.

The government is instead poised to raise tax on banks’ profits. Britain’s four largest lenders made £200bn in pre-tax profits over five years. Healey also faces reduced fiscal headroom as borrowing costs rise, while the Conservatives are demanding spending cuts rather than tax increases.

Capital gains tax is a charge on the profit an individual makes from selling an asset for more than it increased in value. It is not described in the article as a tax on the full selling price. Instead, it targets the gain created between buying and selling an asset.

The article gives two clear examples: second homes and shares. If either becomes more valuable and its owner sells it for a profit, that gain can fall within the tax. This is different from tax on earned income, which comes from work and is the comparison at the centre of Labour’s debate.

Several Labour figures have discussed bringing capital gains rates closer to income tax rates. Healey has decided against an increase for now. Treasury sources fear that higher rates could encourage wealthy owners to postpone sales or move assets out of the country, reducing the revenue collected.

The UK’s four largest lenders generated £200bn in pre-tax profits over the past five years. The figure covers HSBC, NatWest, Barclays and Lloyds Banking Group. Their earnings give the government a substantial-looking source of potential revenue as it prepares the budget.

The article links those strong results to rising interest rates. Banks can earn more when the difference between what they receive and pay on money grows, although the article does not detail each bank’s individual results. The government is reportedly considering taxing those profits rather than raising capital gains tax.

That choice is central to Healey’s revenue plans for 28 October. A bank tax could raise money from companies that have recently reported strong earnings. However, the article does not state how much any proposed bank tax would raise, or the exact rate being considered. The £200bn figure is pre-tax profit, not government revenue.

A higher capital gains tax rate does not automatically guarantee more money for the Treasury. If wealthy individuals change their behaviour, the government may collect less than expected. Treasury sources say that possibility helped shape Healey’s decision not to raise the tax.

The key mechanism is simple. An owner who postpones selling an appreciated asset creates no immediate taxable gain. Someone who moves assets out of the country could also reduce the gains taxed in the UK. Fewer sales or fewer UK-taxable assets would shrink the base on which the charge applies.

This risk is why Healey is expected to seek revenue elsewhere. The budget is likely to target banks’ profits, after the four largest lenders generated £200bn before tax over five years. The article does not quantify the possible loss from deferred sales or relocation, but says an increase might ultimately cost the Treasury.

Some senior Labour politicians have argued that capital gains should be taxed more like income from work. Their concern is that people can face different tax treatment depending on whether money comes from employment or from an asset sale. They see that gap as increasingly difficult to justify.

Wes Streeting called a rise a “wealth tax that works”. He said the existing system created a growing difference between earned income and unearned income. Louise Haigh also suggested a route towards equalising capital gains and income tax rates during the contest to replace Keir Starmer as prime minister.

Healey has taken a different approach. In a recent speech, he said he wanted to prioritise wealth creation without constantly penalising it. He emphasised confidence, investment and profit in British business. Treasury sources also warned that higher capital gains rates could prompt wealthy people to defer sales or move assets abroad.

The government’s main alternative to a capital gains increase is reportedly a tax on banks’ profits. HSBC, NatWest, Barclays and Lloyds Banking Group made £200bn in pre-tax profits over five years. Their strong earnings, linked in the article to rising interest rates, make them a possible source of budget revenue.

The Conservative leader, Kemi Badenoch, proposes a different route. She says the government should reduce spending instead of raising taxes. Her planned examples include cuts to welfare and the civil service. She argues that lower spending would reduce the need for borrowing and help the deficit.

Healey is also reportedly willing to accept less fiscal headroom than Rachel Reeves left under the fiscal rules. Borrowing costs have risen sharply, and analysts say this could halve the £24bn cushion. The budget therefore involves choices between new taxes, spending reductions and accepting less room against the rules.

Fiscal rules are government limits or targets for borrowing, debt and related public finances. Fiscal headroom is the amount of room left before those rules are breached. It acts as a safety margin for a chancellor when forecasts change or new spending and tax decisions are considered.

If borrowing costs rise, the government must spend more servicing its debt. That can worsen the borrowing outlook even without a new spending programme. A smaller margin then remains between projected finances and the fiscal rules. The article says analysts believe higher costs could cut Rachel Reeves’s £24bn cushion by as much as half.

This matters for Healey’s budget choices. He is reportedly willing to accept less headroom, while considering a bank tax instead of higher capital gains tax. Badenoch argues for spending cuts to reduce borrowing. The article links the pressure to rising UK borrowing costs and similar increases in other large economies.