Labour is examining possible major changes to capital gains tax (CGT), which could bring the tax paid on property gains in line with income tax rates.
This review, reportedly being considered at senior levels within the party, signals a wider look at the UK tax system’s structure and is expected to have significant consequences for landlords and property investors.
The proposals, set to be detailed in a report after the May local elections, are part of a broader drive to address fiscal challenges and review how property wealth is taxed.
The measures under discussion could reshape the financial calculations for those selling property assets amid changing economic and political priorities.
Labour considers major capital gains tax reform
Labour is reviewing proposals that would see CGT rates brought in line with those of income tax. Current CGT rates for individuals are 18% or 28% on residential property gains, depending on income level. In contrast, income tax rates can reach up to 45% for the highest earners.
The suggestions form part of a draft policy paper prepared by the Labour Growth Group and the Good Growth Foundation. The proposals seek a fundamental overhaul of the UK’s tax model, aiming to address what advocates see as an imbalance between taxation on earned and unearned income.
Reports indicate that these suggestions have been considered by Labour cabinet ministers and advisers to senior party figures.
Potential impact on property owners
Bringing CGT into line with income tax rates would likely increase the tax bills faced by landlords and property investors making a profit on residential property sales. This change could reduce the attractiveness of buy-to-let as an investment and affect the timing and volume of sales within the sector.
Those considering divestment to release capital gains, particularly landlords who have benefited from rising property prices, may see lower net returns.
Past evidence suggests tax hikes or expectations of tax changes can result in increased property listings as investors seek to exit before new rates take effect.
Proposals for wider tax restructuring
The policy draft reportedly outlines a comprehensive restructuring of the tax system, with aims beyond simply raising CGT. It includes consideration of potential reforms to council tax and land value taxation, and discussions about the abolition of National Insurance alongside income tax cuts.
The intention, according to those familiar with the paper, is to modernise tax policy and enhance perceived fairness, while ensuring the Treasury maintains adequate funding.
Any reduction of income tax or adjustments to National Insurance would require compensatory measures, such as increased CGT revenues or other new taxes.
Historical context of capital gains tax policy
The debate over CGT in the property sector is longstanding. In 2020, then-Chancellor Rishi Sunak asked the Office of Tax Simplification to review CGT, citing the need to address a fiscal gap following the COVID-19 pandemic.
The resulting reports found that aligning CGT more closely with income tax would boost revenues but could have behavioural impacts, especially among property owners and investors. After these reviews, market activity changed notably.
In 2021, data from property portal Zoopla showed that previously rented homes made up 7.2% of new property listings, up from earlier years. This was seen at the time as evidence that tax uncertainty or increases influenced landlord decisions to exit the sector.
Political and financial response
The proposals are set against a background of both political and fiscal pressure. Some analysts suggest the publication of the Labour Growth Group and Good Growth Foundation report after the May local elections could influence party debate, especially if Labour’s election performance is below expectations.
No formal statements have yet been issued by Labour leadership about adopting these recommendations as party policy. However, reports suggest that influential figures, including advisers to Health Secretary Wes Streeting, former deputy prime minister Angela Rayner, and Greater Manchester Mayor Andy Burnham, have seen the proposals.
Final Summary
Labour’s review of capital gains tax, with the possibility of aligning rates with income tax, forms part of a broader agenda to modernise and balance the UK tax system.
If enacted, these proposals could lead to higher tax liabilities for property sellers and potentially reshape the structure of property investment, with wide-reaching effects on both landlords and the broader housing market.
Ongoing discussions underscore the sensitivity and political significance of tax policy as the government seeks solutions to funding challenges and economic growth targets. For sector professionals who need to track developments, tools like the Pie app can help monitor future changes and implications in real time.
