Autumn Budget 2026: Are We Asking the Wrong Question on Capital Gains Tax?

The political momentum behind CGT reform is undeniable. The new Prime Minster, Andy Burnham has repeatedly argued that Britain “over-taxes labour and under-taxes wealth”, while former Health Secretary Wes Streeting has called for a closer alignment between CGT and Income Tax rates, arguing that earnings from work should not be taxed more heavily than gains generated from ownership of assets. Burnham and Streeting have spoken about the need to protect genuine entrepreneurs and business founders, but the direction of travel is clear.

Recently, Lord Jim O’Neill has suggested there is a case for reforming the tax system where some forms of capital gains are treated more like income, while also stressing that genuine risk-takers and entrepreneurs should not be penalised.

Against this backdrop, many are wondering whether substantial CGT reforms could feature in this year’s Autumn Budget, in another moment of déjà vu.

Two months away from the Autumn Budget, the more important question is whether policymakers are asking the right question about CGT in the first place.

The debate has become overly simplistic

The discussion around CGT has increasingly been framed as an issue of fairness.

The argument goes something like this: why should somebody who earns income through employment pay a higher rate of tax than somebody who realises a capital gain?

It is a reasonable question. However, tax policy is rarely as straightforward as a comparison of headline rates.

The danger is that the debate becomes ideological rather than economic.

A tax system should not simply be judged on whether it appears fair in isolation. It should also be judged on whether it encourages investment, supports entrepreneurship, attracts capital, creates jobs and ultimately drives long-term economic growth.

Those considerations have been largely absent from much of the public discussion.

The £12bn claim needs careful examination

Supporters of reform often point to academic research suggesting that aligning CGT more closely with Income Tax could raise billions of pounds each year.

At the same time, HMRC’s own modelling has previously suggested that significant increases in CGT rates could actually reduce tax receipts over time because of behavioural responses.

This apparent contradiction has confused many observers.

In reality, the different studies are often assessing different policy packages.

The larger revenue estimates are not typically based solely on increasing CGT rates. They often include broader reforms designed to prevent income being converted into capital gains, strengthen anti-avoidance measures and address perceived distortions within the existing regime.

Those measures are fundamentally different from simply increasing tax rates.

The recent HMRC consultation on company distributions and arrangements that convert income into capital gains suggests policymakers are already moving in this direction.

CGT is an optional tax

One of the key issues often overlooked in this debate is that CGT behaves very differently from income tax. Employees cannot choose when to receive their salary.

Investors, entrepreneurs and business owners often can choose when to realise a capital gain.

If rates rise sharply, people frequently defer transactions, hold assets for longer or restructure their affairs.

This matters because tax receipts depend not only on rates but also on behaviour.

A significant increase in CGT rates may produce a short-term spike in tax revenues as individuals accelerate disposals before the changes take effect. However, the longer-term impact can be very different if taxpayers subsequently postpone transactions and reduce the number of taxable disposals.

That is why relying solely on rate increases to generate substantial additional revenues is far riskier than some political discussions imply.

What the political debate gets right and wrong

To be fair to Streeting, Burnham and O’Neill, they have highlighted a legitimate concern that the CGT regime is broken.

Where I differ is in the suggestion that higher CGT rates should automatically form the centrepiece of reform.

The focus should instead be on designing a world-class entrepreneurial regime.

The Government should be asking how to reward genuine long-term investment, support business creation and encourage people to take commercial risks.

Those objectives are perfectly compatible with tackling avoidance and closing inappropriate loopholes.

What would be a mistake is treating a founder who spends a decade building a company in exactly the same way as someone whose arrangements simply convert income into gains.

There are lessons from history

This is not the first time the UK has wrestled with the relationship between income tax and CGT.

When I started my career in tax in the early 2000s, we operated a system where Income Tax and CGT rates were aligned. However, there was an important difference.

The taper relief regime reduced the effective tax rate depending on how long an asset had been held and whether it qualified as a business asset.

In practice, this meant genuine entrepreneurs were rewarded for taking long-term risks and building businesses. But critics argued an effective 10% CGT rate to an unlimited level was too generous

The regime was not perfect. There were abuses and some outcomes became difficult to defend. Nevertheless, I strongly believe the underlying principle remains highly relevant today.

If politicians genuinely want to encourage entrepreneurship, they should revisit mechanisms that reward genuine business creation with a compelling system.

If rates are increased, inflation relief must be considered

There is another issue that receives nowhere near enough attention. Inflation.

The UK has experienced significant inflationary pressures over recent years. In many cases, a sizeable proportion of a capital gain reflects inflation rather than a real increase in economic value.

If policymakers intend to move closer to Income Tax rates, they will have to consider reintroducing indexation relief or even a rebasing provision. If this were to happen, it would help investors who have held long-term assets pregnant with large capital gains, and they could see their effective rate of CGT drop far below the present headline rate of 24%.

A modern review of CGT cannot ignore this reality.

What are we seeing ‘on the ground’

From conversations with entrepreneurs, founders and investors, CGT remains one of the most important Budget concerns.

The uncertainty itself is becoming a problem.

Many business owners are reviewing succession plans, considering the timing of exits and re-evaluating investment decisions because they do not know what the future regime may look like. At the extreme, every business owner I have spoken to over the last two years wants to discuss the option of leaving the UK.

The concern is not that reform is being considered. The concern is that reform could be rushed.

Poorly designed reform may raise some additional revenue in the short term, but it risks undermining long-term investment and damaging confidence at exactly the time the UK needs a credible growth strategy.

The real question

The UK does need a comprehensive review of CGT.

The current system has become increasingly complex, contains numerous distortions and no longer reflects a coherent policy vision.

But the objective should not simply be to raise rates.

The real challenge is to create a simpler system that taxes capital fairly, prevents abuse, encourages entrepreneurship, recognises inflation and supports economic growth.

If the Government focuses solely on equalising rates, it is asking the wrong question.

If it focuses on creating a modern, pro-growth and entrepreneur-friendly tax system, it has an opportunity to get CGT reform right for the first time in a generation.