What if Income Tax and Capital Gains Tax bands were aligned?
What if Income Tax and Capital Gains Tax bands were aligned? Sean Drury, head of tax at leading audit, tax and business advisory firm, Blick Rothenberg, gives his views.
There has been lots of ongoing speculation about whether the UK may align the Income Tax and Capital Gains Tax bands, but what practically would happen were the UK to do this? It is not as simple as taxing capital like income; they are fundamentally different.
The principle of taxation on ‘gains’ has existed in effect in history far longer than the principle of taxation on income and therefore these principles have been set through centuries of experience. The systems of taxing ‘Realised’ gains, i.e. at a point where a conversion of the value of an asset into ‘money’ or ‘money’s worth’ is commonly referred to as Capital Gains Tax, whereas the taxation of ‘unrealised gains’ or ‘asset values’ is generally what is described as ‘wealth’ taxes.
Tinkering with Capital Gains Tax always is emotive but considering aligning the tax rates with income tax would be a substantial shift which would be difficult to message to businesses and individuals. Looking at the G7, although there are widely differing systems for taxing gains, the overall rates of tax range between 20-30% for assets held more than 1 year – basically where the UK currently is.
One of the main reasons countries have opted towards reduced rates on capital gains (often around 50% of the main headline income tax rates in the countries) is to have a simple system without requiring overtly complex rules to try and navigate the fact that over time the ‘real’ gain is reduced by the impact of inflation – which would be grossly unfair to tax. Also, inherently assets as well tie up capital (which often has already been taxed as income) which is inherently risky and can’t be used while it is tied up in the asset– so having a lower tax on capital gains motivates people to do that, especially when investing in the long term in businesses through shareholdings; so why would you take the risk if the returns are significantly reduced through increasing the tax rate on it?
Reference has been made to going back to the 1980’s when Nigel Lawson last aligned Income Tax and Capital Gains Tax. What isn’t mentioned is how complex the system became with indexation allowance tables, share rebasing with separate pools and clunky reliefs implemented to relieve distortions and unintended consequences. Through experience this ultimately led first to taper relief, which was difficult for the layman to understand, and then simplification by removing the complexity and recognising the impacts of inflation by a simple lower tax rate. In 1979 about 68,000 people paid capital gains tax – in 2025 (the last year we have figures) the number was 584,000 – a much more complicated beast.
Centuries of global experience for market driven economies has led to a broad principle of a simple system of Capital Gains at approximately half of the Income Tax Rate – we should remain absolutely within that pack. Deviating from this will not only affect future investment or growth, but will probably lead to gains not being realised unless absolutely necessary by awaiting to see what happens in the next parliament, therefore impacting on Liquidity. We operate much more in a global market for investment; therefore, we should learn from what other countries do and the tax policies they implement.
Our biggest issue and our route to salvation has to be increasing the wealth of the entire country proportionately through growth and productivity. Tax policies should promote this front and foremost, aligning Capital Gains Tax will hamper investment and directly restrain growth – it is basic maths.
The only people who will benefit from alignment will be within the Tax Advisory industry as the system of recognising the inflationary impact, recognising the varieties and different natures of ‘assets’ and the necessary reliefs required will recreate an industry which was gradually dismantled through simplification.