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Capital gains tax (CGT) was first introduced in 1965 on capital gains made on the disposal of assets by individuals, personal representatives and trustees.  It is charged on gains in excess of the annual exempt amount, set at £12,300 for 2020/21.[1]  The tax is forecast to raise £11.4 billion in 2020/21.[2]

Over the last thirty years, CGT has been substantially reformed three times, as successive governments have sought to meet a number of different concerns: that the tax be charged on real, rather than inflationary gains; that the tax should promote long-term investment and entrepreneurship; and that the tax should not act as an incentive for individuals to avoid income tax, by converting their earnings or profits into capital gains.

In the 1980s the Conservative Government’s concern was that savers and investors were being taxed on paper gains, arising from severe price inflation over the previous decade. Successive Conservative Chancellors introduced an allowance to take account of inflation, ‘rebased’ assets so that only gains made since 1982 would be taxed, and aligned the rates of tax with the rates of income tax.  In the late 1990s the Labour Government’s priorities were to use CGT to encourage business growth, and in a time of low inflation, it replaced indexation allowance with a relief which tapered chargeable gains by reference to the length of time assets were held.  The taper was more generous for business assets. 

By 2007 it was apparent that this relief for business assets was being exploited by executives in private equity funds – some of the most highly-paid individuals in the country – to pay CGT on their gains at 10%, rather than income tax at 40%. In October that year the then Labour Chancellor, Alistair Darling, proposed removing this incentive by abolishing taper relief, and setting a single rate of tax at 18%.  Concerns that this would penalise the owners of small business lead to the Government introducing a new ‘Entrepreneurs Relief’ alongside these changes from April 2008.  In its 2009 Budget the Labour Government confirmed that from April 2010 a new 50% higher rate of income tax would apply on incomes over £150,000.  In turn this led to concerns that the structure of CGT might provide too great an incentive for the very wealthy to avoid tax. 

In May 2010 the new Conservative-Liberal Coalition Government announced that it would “seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.”[3]  On 22 June the Chancellor, George Osborne, presented the Government’s first Budget.  In his Budget speech Mr Osborne said that in reforming CGT, “my concern has been to balance the competing demands of fairness, simplicity and competitiveness.” A new 28% rate would apply, from midnight on Budget day, to gains made by higher rate taxpayers. The 18% rate would remain for basic rate taxpayers.  Entrepreneurs’ Relief would be substantially increased to “protect the incentives to succeed in business and to innovate”, but there would not be a new relief for the length of time an asset had been held, as “the complexity and administration involved [in tapers or indexation allowances] would have been self-defeating.”[4]

Over the remainder of the 2010-15 Parliament the Coalition Government did not make any other major changes to the tax. Some commentators suggested that the higher rate of 28% continued to provide an incentive for the wealthiest to avoid paying income tax by obtaining remuneration in the form of capital gains rather than income.[5] Arguably this incentive was reduced by the cut in the top rate of income tax from 50% to 45%, which was announced in Budget 2012 and took effect from April 2013.[6]

In March 2016 the then Chancellor, George Osborne, presented the Conservative Government’s second Budget, following the 2015 General Election, and as part of this, announced that both rates of CGT would be cut, with effect from 6 April 2016: the higher rate would be cut from 28% to 20%, and the basic rate cut from 18% to 10%. Gains from carried interest and from the sale of residential property would continue to be charged the existing rates of tax.[7] It was forecast that this change would cost £630m in 2017/18, rising to £735m in 2020/21.[8]

Generally receipts from CGT are quite cyclical, though these reforms have made revenues a good deal more volatile in recent years.[9] As the Institute for Fiscal Studies has noted, the tax is highly progressive, disproportionately paid by a small number of taxpayers realising very large gains. This reflects the structure of the tax – the level of the annual exemption, and the fact that both gains made on the sale of one’s main residence and on assets held in pension funds or ISAs are tax-exempt.[10] In 2017/18 more than half of all individuals’ CGT liabilities came from 9,000 people who realised gains more than £1m.[11]

In the next three Budgets the Conservative Government did not announce any further major reforms to CGT, although over this period there was considerable speculation that the Government might restrict or abolish Entrepreneurs’ Relief.[12] The cost of this relief has risen considerably faster than initial projections,[13] and by 2015/16 its annual cost had reached £4.3 billion. The estimated annual cost fell by around 50% the next year, a change that HMRC attribute to the 2016 Budget changes in CGT rates; HMRC estimate that the relief cost £2.1 billion in 2019/20.[14] 

In July 2019 the Office for Budget Responsibility published its detailed assessment of the various risks to the public finances over the medium term, and, as part of its analysis of the risks for Government tax revenues, looked at tax expenditures and tax reliefs. The OBR argued that Entrepreneurs’ Relief met “many characteristics of a relief that poses a fiscal risk” as it had “increased significantly in cost, and the reasons for the rise (and recent fall) are largely unknown, raising the possibility that the assumptions underpinning our forecast fail to factor in something that has affected its cost in the past.”[15] The report also noted that “gains from this relief are increasingly concentrated on a small number of wealthier claimants. In 2016-17 there were 5,000 individuals making gains of greater than £1 million, and, in aggregate, they made up three quarters of the total gains for which Entrepreneurs’ Relief was claimed.”[16]

Initially it was anticipated that the 2019 Budget would be on 6 November, but the Budget was postponed due to the timing of the General Election.[17] Following the Conservative Party’s election victory, the Government announced the Budget would be on 11 March 2020.[18] In its Election Manifesto the Party had stated that it would “review and reform entrepreneur’s relief”,[19] and in his 2020 Budget speech the Chancellor Rishi Sunak announced that while the relief would be retained, the lifetime limit would be cut from £10m to £1m.[20] The reduction in the lifetime limit applies from Budget day, with special provision for disposals entered into before 11 March 2020 that have not been completed.[21] It is estimated that this measure will raise £6.3 billion in total by 2024/25.[22]

This note looks at the recent debate about CGT, the Coalition Government’s reforms in the 2010 Budget, and the current Government approach to the tax. The historical background to these developments is examined in two other Commons briefing papers.[23]


[1]     HM Treasury, Overview of Tax Legislation & Rates, March 2020 (Annex A)

[2]     OBR, Economic & Fiscal Outlook, CP 230, March 2020 (Table 3.3). This compares with forecast receipts from income tax of just under £208 billion in the same year.

[3]     HM Government, The Coalition: our programme for government, 20 May 2010 p30

[4]     HC Deb 22 June 2010 cc178-9

[5]     see, Institute for Fiscal Studies, 2012 Green Budget, February 2012 pp 180-196

[6]     see, Income tax: the additional 50p rate, Commons Briefing paper CBP249, 26 September 2018.

[7]     HC Deb 16 March 2016 c965. See also, Budget 2016, HC901, March 2016 para 1.171

[8]     Budget 2016, HC901, March 2016 p85 (Table 2.1 – item 28)

[9]     HMRC, CGT Statistics, October 2017 edition, table 14.1 (this is reproduced in an annex to this paper.)

[10]    IFS, Green Budget 2015, February 2015 – see, “Chapter 10: Options for increasing tax” p241

[11]    In 2017/18 total receipts from individuals were £8.2bn, of which £5.1bn came from this group of taxpayers (see, HMRC, CGT Statistics, August 2019 table 2).

[12]    For example, “Is entrepreneurs’ relief for the chopping block?”, Tax Journal, 7 September 2018

[13]    National Audit Office, The Effective Management of Tax Reliefs, HC 785, November 2014 (para 2.11-6).

[14]    HMRC, Bulletin: estimated cost of tax reliefs, October 2019 p11

[15]    OBR, Fiscal Risks Report, CP 131, July 2019 para 4.98

[16]    op.cit. para 4.96. For a breakdown of taxpayers claiming this relief by constituency see: PQ26898, 12 March 2020.

[17]    HM Treasury, Chancellor Letter to the Treasury Select Committee on the Budget, 25 October 2019

[18]    HMT press notice, Chancellor launches Budget process to usher in ‘decade of renewal’, 7 January 2020

[19]    Conservative Party, General Election 2019 Manifesto, December 2019 p34

[20]    HC Deb 11 March 2020 cc285-6

[21]    HMRC, Capital Gains Tax Entrepreneurs’ Relief – reduction in the lifetime limit, 11 March 2020

[22]    Budget 2020, HC 121, March 2020 p67 (Table 2.1 : item 46). Estimated receipts are: £5m (2019/20), £215m (2020/21); £1,120m (2021/22); £1,470m (2022/23); £1,670m (2023/24); £1,820 (2024/25).

[23]    Capital gains tax : background history, CBP860, 2 June 2010; Capital gains tax : the 2008 reforms, CBP4652, 3 June 2010

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