Luxury properties in the Kensington and Chelsea district of London, U.K.
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This report is from this week’s CNBC’s UK Exchange newsletter. Like what you see? You can subscribe here.
The dispatch
Jockeying for position in the as-yet-unlaunched contest to lead Britain’s governing Labour Party, Wes Streeting, the former health secretary, has promised a wealth tax if elected leader.
“We need a wealth tax that works,” he told the BBC last week. “A pound made from simply owning assets should not be taxed less than a pound made from a hard day’s work.”
Strictly speaking, Streeting is not actually proposing a wealth tax. Rather, he wants to align the rates of capital gains tax (CGT) and income tax.
Presently, higher and additional rate taxpayers pay marginal rates of 40% or 45% on earnings, but are charged 24% on capital gains over £3,000 (around $4,000) per year (an individual’s first home is exempt) or 32% on gains from carried interest.
Citing work by the Centre for the Analysis of Taxation, a centre-left think tank, Streeting claimed aligning the rates would net the Treasury an additional £12 billion annually.
That seems optimistic. Capital gains tax is easily avoided by not selling assets, and any liability is wiped out when the owner of those assets dies — although the U.K.’s hefty 40% inheritance tax may be incurred.
It’s different this time
Such a move has been debated for a while. Rachel Reeves, the chancellor (finance minister), urged it in a 2018 pamphlet.
And there is a precedent. Nigel Lawson, one of Britain’s greatest reforming chancellors, aligned income tax and CGT rates in 1988, arguing it brought “greater neutrality in the tax system,” while being consistent with how companies were taxed.
The big difference between then and now is that the top rate of income tax is currently higher.
A CGT rate set at 40-45% would be the highest in Europe and probably drive more wealth creators away — a process Reeves is thought to have triggered in October 2024 when she abolished Britain’s tax exemption on offshore trusts.
Another potential flaw is that CGT is historically lower than income tax because part of any capital gain will be due to inflation.
It is why various chancellors have introduced reliefs and allowances over the years to ensure only “real” gains, rather than inflationary ones, are taxed.
There is also an argument that CGT should be lower than income tax because those incurring it usually do so after taking risks benefiting the economy, such as launching a business and employing others.
So what of a more straightforward wealth tax? Well, the better-off have already been targeted by the current government via an increase in the CGT rate on carried interest, the move on offshore trusts and hikes in dividend taxation.
There is also a looming “mansion tax” coming in April 2028 on homes worth more than £2 million and, in addition, the U.K. already has some of Europe’s highest death taxes.
But polling suggests most Labour members — who will elect the new leader — would still love a straightforward wealth tax on assets.
That is despite evidence from Europe, where most countries in recent years have scrapped wealth taxes or in the case of France, hugely reduced their scope. Such levies seldom raise as much as hoped.
There is also the complexity involved in implementing a wealth tax — for example, in regularly valuing private businesses, pensions and property — and the fact that Britain’s tax authorities currently lack the infrastructure to do so.
As Denis Healey, Labour’s chancellor from 1974 to 1979, wrote in his 1989 memoir: “We had committed ourselves to a wealth tax, but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle.”
Half a century on, it is likely any chancellor will face those same problems should they try again.
— Ian King
Need to know
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Yields on U.K. government bonds fell to five-week lows on Tuesday as investor concerns about political developments eased and optimism for a U.S.-Iran peace deal helped scale back expectations for interest rate hikes.
UK-Gulf trade deal a ‘monumental achievement,’ Bahrain industry minister tells CNBC
Abdulla bin Adel Fakhro, Bahrain’s minister of industry and commerce, said the free trade agreement was a win-win for the U.K. and Gulf Cooperation Council, and “very significant.”
PRO: How investors are trading the UK as political turmoil rattles British markets
Despite the political turmoil that has gripped Westminster, many investors continue to take a bullish view on London-listed equities.
— Katrina Bishop
Coming Up
MAY 29: Nationwide House Price Index
JUNE 2: Mortgage approvals; M4 money supply data
