UK’s Wes Street calls for wealth tax with capital gains changes

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Former health secretary Wes Streeting, who is vying for a position in the yet-to-be-started election campaign to lead Britain’s ruling Labor Party, has promised to impose a wealth tax if elected leader.

“We need a working wealth tax,” he told the BBC last week. “A pound earned simply by owning property should not be taxed less than a pound earned through hard work.”

Strictly speaking, Street isn’t actually proposing a wealth tax. Rather, they would like to see capital gains tax (CGT) and income tax rates aligned.

Currently, high-rate and supplementary-rate taxpayers pay a marginal tax rate of 40% or 45% on their gains, but capital gains over £3,000 (approximately $4,000) per year are taxed at 24% (a person’s first home is exempt), or gains from carried forward interest are taxed at 32%.

Mr Street cited research by the Center for Taxation Analysis, a centre-left think tank, which argued that adjusting tax rates would generate an extra £12bn a year in extra profits for the Treasury.

That seems optimistic. Capital gains tax can easily be avoided by not selling the asset, and the debt is written off when the owner of the asset dies, but inheritance tax can be as high as 40% in the UK.

Such a move has been discussed for some time. Prime Minister Rachel Reeves (Finance Minister) made this strong point in a 2018 pamphlet.

And there is precedent. Nigel Lawson, one of Britain’s greatest reformist prime ministers, harmonized income tax and CGT rates in 1988, arguing that it would bring about “greater tax neutrality” while still aligning with the way businesses were taxed.

The big difference between then and now is that the top income tax rate is now higher.

If the CGT tax rate were set at 40-45%, it would be the highest in Europe and would likely displace more wealth creators. Mr Reeves is thought to have started the process in October 2024 when he scrapped the UK’s tax exemption for offshore trusts.

Another potential flaw is that CGT has historically been lower than income tax, as some capital gains are due to inflation.

This is why various Chancellors have introduced bailouts and allowances over the years to ensure that only ‘real’ profits are taxed, rather than inflationary profits.

There is also an argument that CGT should be lower than income tax. This is because people who incur CGT usually do so after taking risks that benefit the economy, such as setting up a business or employing others.

So what about a simpler wealth tax? Well, the wealthy are already being targeted by the current government through higher CGT carryover rates, the offshore trust movement, and higher dividend taxes.

In April 2028, a “mansion tax” is looming on homes worth more than £2 million, and the UK already has the highest death tax in Europe.

But polls show that the majority of Labor MPs who will elect the new leader still support a simple wealth tax on assets.

This is despite evidence from Europe, where most countries have abolished wealth taxes in recent years or, in the case of France, significantly reduced their scope. Such levies rarely rise as much as expected.

There are also complexities to implementing a wealth tax, including the fact that the UK tax authority currently lacks the infrastructure to implement a wealth tax, such as regular valuations of private companies, pensions and wealth.

Dennis Healy, Labor Prime Minister from 1974 to 1979, wrote in his 1989 memoirs: “We have been working on a wealth tax, but found it impossible to draft a tax proposal that would generate enough revenue over five years to justify the administrative costs and political effort.”

Half a century later, any prime minister would likely face the same problem if he tried again.

— Ian King

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