03-08-2025
Reeves is cynically squeezing us dry– without raising taxes
The Chancellor has not had much luck with some of her tax rises. Rachel Reeves was expecting to raise up to £3.2bn each year, or around £12.7bn in this parliament, with the scrapping of non-dom status – a policy announced by her Conservative predecessor Jeremy Hunt and then ramped up by Labour. She is heading for disappointment.
With the exodus of more than 10,000 millionaires from the UK last year and an expected 16,000 this year, Reeves has been warned that the move may in fact reduce rather than increase tax receipts. Speculation is thus rife that the measures may be further watered down; there has already been some initial tweaking and softening earlier this year.
The imposition of VAT on school fees is likewise now widely expected to raise less than the predicted £1.7bn by 2030, due to more than expected numbers of children transferring to the state sector and becoming a burden on education budgets. The spate of independent school closures – not just as a result of the VAT change but also employer National Insurance rises, the loss of business rate relief for schools with charitable status and the gamut of extra regulation affecting all businesses – will inevitably make this worse.
But, ironically, Reeves may have been rather more adept at boosting Treasury revenue with some of the tax measures she did not actually implement.
Before last year's Halloween Budget there was much speculation that rates of capital gains tax (CGT) would be brought into line with those for income tax. This would have meant that higher-rate taxpayers earning over £50,270 would have had to pay 40pc instead of 24pc on taxable property gains and 20pc on other assets. Additional rate taxpayers, earning over £125,140, even worried they might be faced with a full 45pc levy on any uplift.
The fear that these rates would be aligned was an entirely rational one. The great Conservative chancellor Nigel Lawson in his 1988 Budget had done just that – although the medicine that year was very much sweetened by the scrapping of all income tax rates over 40pc at the same time.
Labour's manifesto, while pledging not to raise the rates of income tax or employee National Insurance, was silent about CGT. And after winning the election, Sir Keir Starmer and Reeves never tired of talking up a £22bn 'black hole' the Tories had allegedly left them. This would soon need filling – and Reeves did nothing to dampen down speculation that CGT rises and changes to the pension regime would be how she would achieve at least part of this.
In the event, the Chancellor took less drastic action. She raised the rate of CGT for non-property gains from 10pc to 18pc for basic-rate taxpayers and 20pc to 24pc for those on the higher and additional rates. In other words, she aligned the rates for different asset classes to the one already levied on property.
But the speculation alone did pay dividends for Reeves. In October last year, the month running up to the Budget, CGT receipts on residential property disposals was £408m – more than double that of most other months in the last tax year. Revenue from CGT is notoriously volatile when compared to other taxes. In the 2023-24 tax year, for example, CGT liabilities were 18pc down from the previous year. But the surge in the run-up to the Budget was vast.
The best explanation for the Treasury's October windfall is that residential landlords sold up in advance of a clobbering that did not materialise.
As Chris Etherington, of accountants RSM, has noted: 'It is clear that anticipation of CGT changes can distort taxpayer behaviour... the Chancellor benefitted from an inadvertent windfall... Reeves does not necessarily need to increase CGT rates to raise revenues. It's potentially possible to maximise CGT receipts by simply saying very little on the subject.'
The Chancellor will insist that she cannot speculate about what moves she will be making in future Budgets – due to such information having an impact on the markets. But that argument does not quite wash. She is more than happy to rule out some fiscal moves, such as raising the rate of income tax. So why not others?
Is it too cynical to suggest that Reeves has found her own third way? She can benefit from increased inflows without actually raising taxes.
But such tactics are far from victimless – the uncertainty and disruption caused comes at a high price. Additionally, it makes it much more difficult for people to plan for the future and may make them take unnecessary decisions that they will live to regret.
In other circumstances, allowing speculation to rip may in fact hurt Treasury coffers. Not closing down current Labour Party debates about a wealth tax will surely mean more wealthy people leaving the UK in anticipation of such a move. This will not only hurt our economy but also mean lower tax yields, resulting in less money for public services.
