Few UK policies have faced as turbulent a history over recent decades as Capital Gains Tax (CGT). The current CGT regime is the product of a series of contradictory reforms that have rendered the rules needlessly complex, inefficient, and unfair. Laying out a roadmap for much-need change, this report recommends a comprehensive package of CGT reforms going beyond changes to the tax rate. We use de-identified tax data accessed via His Majesty’s Revenue and Customs (HMRC) to provide estimates of the revenue and distributional impacts of these recommendations. Importantly, our policy proposals include changes to the tax base that will shut down opportunities for tax avoidance and improve investment incentives and growth. We emphasise that these measures are essential alongside any increases in the tax rate in order for CGT reform to be effective.
A. Advani, H. Hughson, J. Inkley, A. Lonsdale and A. Summers (2024), CenTax Policy Briefing
Capital gains are currently taxed at much lower rates than income. This encourages individuals to work in a form that allows them to be paid in capital gains. While many small companies are highly productive, these personal service companies are typically not designed to ever grow. A negative side effect of low CGT rates is the proliferation of these businesses, which not only reduce the overall tax take, but hamper productivity by having people working in ways that are less efficient but are individually optimal because of the tax saving. We present new quantitative evidence that a large share of capital gains in the UK are, in fact, the returns to labour rather than capital. First, using a reform which aimed to make it harder to regularly pay out income as capital gains, we show at the individual level a large spike in company liquidations, as individuals attempted to benefit from CGT treatment one final time before the new rules were in place. Second, using de-identified administrative microdata from HMRC, we show at a macro level that over half of gains come from private business assets with annualised returns over 100%, suggestive that for many this money is not actually the return to capital, but to labour.
A. Advani, C. Poux and A. Summers (2024), CenTax Policy Briefing
The UK is unusual amongst international peers in not levying any tax on people who leave the country after making substantial capital gains whilst living here. We provide the first quantitative evidence on UK nationals who leave the UK after building a UK business, studying where they went and how much CGT revenue is potentially lost. We recommend that the UK should follow the approach of Australia and Canada by levying a ‘deemed disposal on departure’ (DDD) for people who leave the UK, accompanied by ‘rebasing on arrival’ (ROA) for people arriving in the UK.
Removing the harmful distortions created by the poor design of the UK’s CGT should be a key focus of policy. This chapter sets out how the tax base could be reformed to greatly reduce – and in some cases largely remove – the distortions to saving, investment and risk-taking. With a reformed tax base, tax rates could be increased with much less distortion to choices over whether, when or how to invest. We summarise a ‘big-picture solution’ that involves reforming the tax base while aligning overall marginal tax rates across all forms of gains and income. We also discuss steps that could be taken towards this end goal and who would win and lose from reforms.
This briefing presents new research on the distribution of capital gains and characteristics of taxpayers who receive them. It contributes to the debate on Capital Gain Tax (CGT) reform by outlining who would be most affected by changes to this tax. We investigate this question using de-identified, confidential data accessed via HMRC, which provides information on all individuals with taxable capital gains from 1997 to 2020.
We show that only 3% of adults paid CGT over the decade up to 2020. Most gains go to high income individuals, with almost half going to individuals earning above £150,000. More than half of all gains go to just 5000 people - 0.01% of the population - who receive £6.8m each on average. Gains are also geographically concentrated, with more gains in Kensington than all of Wales, and more gains in Hampstead than the entire North East. Notting Hill West - a neighbourhood of 6,400 people - received more in gains over a five year period than Liverpool, Manchester and Newcastle combined.
The IFS Green Budget Chapter looks at the effects of inheritance tax reforms on tax revenue and distributional outcomes. We begin by setting out the status quo position for inheritance tax, and the likely trends in the absence of reform. We highlight a number of problems with the current form of inheritance tax, and make recommendations for reform. We then provide static costings for these reforms, as well as for increasing or decreasing the scope of the tax. This includes the possibility of abolition. Finally we study who would benefit from these reforms, by wealth level of the person leaving the inheritance, by region of the country, and for recipients by wealth level of their parent.
The Register of Overseas Entities (ROE) was introduced by the government in Spring 2022 with the commitment that it would “require anonymous foreign owners of UK property to reveal their real identities”. We use data released by Companies House and HM Land Registry to assess to what extent the ROE is currently delivering on this aim. We identify and quantify several major ‘gaps’ in the scope and operation of the register and make recommendations for how the register could be improved.
T. Pope, G. Tetlow and A. Advani, (2023), Institute for Government
A key tenet of good policy making is use of the best available evidence. Tax is an important policy area, and one where a wealth of evidence – quantitative and qualitative analysis, and broader intelligence and insights – is generated by researchers, practitioners and officials. This report documents how different types of evidence feed into tax policy making. By highlighting the role evidence plays, and which types of evidence have an impact at different stages of the process, we aim to help external stakeholders to understand how the evidence they produce is used and how they could better feed into policy making. We also provide recommendations for how government can further shift its approach, already improved in recent years, to enhance the quality of the evidence base and to use this more effectively.
A. Advani, E. Chamberlain and A. Summers (2023), Tax Journal
A lively article in this journal asks the question 'Is now a sensible time to introduce a wealth tax in the UK?' (D Hanna, Tax Journal, 7 June 2023). Its subtitle contains the answer 'Not if
Norway is any guide.' The search for international examples is a natural one,
but it is also fraught with danger unless we try to understand the overall
policy context. We explain why the example of Norway is not a lesson about modest
tweaks to a wealth tax.
This short note summarises some key facts about non-doms, and explains the case for
reform to the current regime. It first explains briefly what it means to be a non-dom,
the tax advantages this can bring, the costs associated with use of these tax benefits,
and past reforms to the regime. It then provides some key statistics on non-doms in the
UK. Finally, we explain why the regime is in need of reform.
This CAGE Policy Briefing studies the offshore income and capital gains of the
UK's ‘non-doms’ – individuals who are resident in the UK but who claim on their
tax return that their permanent home (‘domicile’) is abroad. We use de-identified
confidential data accessed via HMRC to analyse all individuals who have claimed
non-dom status between 1997 and 2018. We show non-doms at least £10.9 billion
in offshore income and gains. Most of these unreported income and gains (55%)
belong to non-doms who arrived in the UK in the past five years. Looking at
previous reforms that restricted access to the non-dom regime, we see these led to
very little emigration. Those who did leave were paying hardly any tax.
Consequently, abolishing the non-dom regime would raise at least £3.2 billion even
after accounting for migration and other tax planning, and the loss of existing
revenue from the remittance basis charge.
This CAGE Policy Briefing studies the UK's ‘non-doms’ – individuals who
are resident in the UK but who claim on their tax return that their permanent
home (‘domicile’) is abroad. We use de-identified confidential data accessed via
HMRC to analyse all individuals who have claimed non-dom status between 1997
and 2018. We show non-doms are globally connected and economically elite: almost
all were either born abroad or have lived abroad for substantial periods, and their
incomes are very high. Non-doms are highly likely to work in finance and other ‘City’
jobs. They tend to come from Western Europe, India and the US. Within the UK they
largely reside in and around London, although there are sizeable shares in Oxford and
Cambridge, working in research and education, and in Aberdeen, working in oil.
This CAGE Policy Briefing studies the individuals who make up the UK's
Sunday Times Rich List (STRL). These are the 1000 richest people or
families with strong ties to the UK. We link together information in the
STRL with multiple other data sources to analyse the foreign connections
of STRL members, the industries with which they are associated, and their
corporate ties to UK land and property. One in seven appear not to be UK
resident for tax purposes. Among billionaires, one in seven are located
in tax havens. Collectively they own almost £2 trillion in UK wealth.
This CAGE Policy Briefing studies alternatives to the
government’s new Health and Social Care Levy. Using publicly
accessible tax data from HMRC, we find that removing the current
National Insurance exemptions for investment income and people
of pension age would raise £12 billion. This is the same amount
of revenue as the Government is targeting from its new Levy.
Equalising National Insurance on higher earnings with the rates
already paid by lower earners could raise an additional £20
billion. This would be enough to fund a cut in the main rate of
NICs by 1.25p, instead of raising these rates, as the government
is planning. Under this alternative package of reforms, more of
the revenue would come from London and the South East, and from
older, wealthier individuals.
A. Advani, E. Chamberlain and A. Summers (2021), Tax Journal
A thoughtful analysis appeared in this journal of
our final report
on a wealth tax for the UK (‘The Wealth Tax Commission’s final report’
(P Barclay, G Price & T Schlee), Tax Journal, 8 January 2021).
For a full discussion of the final report, we would refer
readers to the
frequently asked questions
that deal with some of the misunderstandings that have emerged
and the
longer final report
(or for a quick read the
executive summary). However, we here respond to some specific points raised in
the article.
This report presents the final findings of the Wealth Tax
Commission into whether the UK should have a wealth tax. It
concludes that if the government chooses to raise taxes in
response to COVID, it should implement a one-off wealth tax in
preference to increasing taxes on work or consumption.
Economists are central to policymaking in the UK, and to
providing the research that underpins that policymaking. Despite
having this important role in society, economists are not very
representative of society, with a well-documented
under-representation of women in the profession. In this
briefing note, we examine the ethnic diversity of academic
economists who provide much of the research that ultimately
feeds into policymaking. We use data from the Higher Education
Statistics Agency (HESA) to look at which groups are more or
less well represented as academic economic researchers. We then
examine economics students, to understand both the source of
current under-representation and the prospects for change.
Finally, we study some of the barriers faced by economics
students. We are not able to examine diversity among the large
number of economists who work outside academia, due to a lack of
data.
This report introduces the UK Wealth Tax Commission, which will
evaluate whether a wealth tax for the UK would be desirable and
deliverable. To do this we have commissioned a series of
Evidence Papers that will study each of the key issues in
detail. In this report we set out initial evidence on what has
been happening to wealth and wealth taxation in the UK. We
examine the provisional case for a wealth tax, and map some of
the difficulties in implementing it. Our intention here is not
to provide the answers, but to illustrate the key issues this
project will address and set out the path to our final report in
December, which will contain our conclusions on whether or not
the UK should have a wealth tax, and if so, how it should be
designed.
This CAGE Policy Briefing summarises new research on the taxes
paid by the UK’s richest individuals, using anonymised data
collected from the personal tax returns of everyone who received
over £100,000 in total remuneration (taxable income plus taxable
capital gains). It shows how tax paid as a share of income or
total remuneration varies across individuals. It shows effective
tax rates are much lower than headline rates, regressive at high
levels of income or remuneration, and vary by up to a factor of
five across people with the same remuneration. An
Alternative Minimum Tax of 35% could raise around £11bn,
equivalent to 2p on the basic rate or 5p on both the higher and
additional rates.
This CAGE Policy Briefing summarises new research on the impact
of capital gains – which are excluded from existing income
statistics – on measured inequality in the UK. It shows gains
are highly concentrated, are persistent for a minority, and are
rising. The richest have a larger share of total resources than
previously thought, and it has been growing over time.
Capital gains (the profits from disposing of an asset for more
than it was worth when you acquired it) are generally excluded
from analysis of incomes in the UK, despite being a significant
driver of some people’s lifetime living standards. This
Resolution Foundation Report looks at what we know about taxable
capital gains; how our understanding of top income shares
changes if we include capital gains in our analysis; and whether
definitions of income used in official statistics should be
changed or supplemented.
The future of UK economics is looking predominantly male and
disproportionately privately educated. This column introduces
#DiscoverEconomics – a campaign to increase diversity in
economics led by the Royal Economic Society and with the support
of a wide range of institutions involved in economic research,
communication and policymaking, including the Bank of England,
the Government Economic Service, the Society of Professional
Economists and many leading research institutions. The campaign
aims to attract more women, ethnic minority students, and
students from state schools and colleges to study the subject at
university.
This SMF-CAGE Briefing Paper explains which types of individuals
are most likely to be non-compliant on their tax returns, and
what can be done to improve compliance and raise tax revenue.
This IFS Briefing note uses data from HMRC’s random audit
programme to show which types of people are more likely to be
under-reporting taxes and how their behaviour changes after a
tax audit. The results are based on data from audits covering
tax returns for the years 1999–2009.
The report analyses and assesses: the rationale and objectives
of energy policy; the current policy landscape faced by UK
energy users; how current and future policy has led to
inconsistencies in the implicit carbon prices faced by different
users; and potential ways in which to improve policy affecting
domestic and business energy users.
Government wants both to reduce carbon emissions and to reduce
‘fuel poverty’. Energy prices have risen in part because of a
multitude of policies aimed at reducing emissions. There are
also multiple policies aimed at ameliorating these effects.
Altogether, this leads to a complex policy landscape,
inefficient pricing and opaque distributional effects.
In this report, we show the effects of energy price rises over
the recent past, look at what current policies mean for
effective carbon prices and their impact on bills, and consider
the distributional consequences of a more consistent approach to
carbon pricing, alongside possible changes to the tax and
benefit system that could mitigate these effects.
The latest statistics on Household Total Wealth in Great Britain from the ONS are a welcome but limited insight into what has been happening to wealth in Great Britain. Limitations in survey response means they will underestimate the share of wealth at the top. While they will not tell us what has happened as a result of the pandemic, we can use them to provide an educated guess.
The gender pay gap opens up immediately after graduation, with
male graduates earning 5% more than female graduates on average
at age 25. Ten years after graduation – before most graduates
start having children – the gender pay gap stands at 25%. Most
of the initial gap can be explained by university subject choices,
with women less likely to study subjects that lead to high-paying
jobs: women make up just a third of graduates in economics, the
subject with the highest financial returns, and two thirds of
graduates in creative arts, the subject with the lowest returns.
Subject choice continues contribute to the gender pay gap over
time, but its relative importance fades as other factors (like
having children and working part-time) come into play.
A. Advani, D. Prinz, A. Smurra and R. Warwick (2021), IFS
Observation
Carbon pricing will be one of the most talked about policy
options at COP26. The idea of carbon pricing is that putting a
price on the emission of greenhouse gases (GHGs) to reflect the
social costs of climate change should provide producers and
consumers with strong incentives to reduce such emissions. In
this observation, we consider the opportunities and risks from
introducing carbon taxes in developing countries, with reference
to Ethiopia and Ghana as case studies.
In the wake of last summer’s Black Lives Matter protests, many
have asked themselves what they are doing to tackle racial
injustice. For economists, one central question is the extent to
which the profession has examined the causes and consequences of
racial inequality. This column reports evidence that
race-related research in economic journals constitutes a far
lower share than in comparable publications in sociology and
political science. What’s more, economists over-estimate the
extent of race-related research done by the profession.
Understanding why economists produce so little race-related
research is essential if the discipline is going to be able to
reform.
A. Advani, S. Sen and R. Warwick (2021), IFS Observation
The economics profession – and the current student population
studying economics – is not representative of society, with
women, some ethnic minorities, and state school students
underrepresented. While more than 7% of private school boys
doing an undergraduate degree were studying economics in
2018/19, less than 1% of state school girls were. We highlight
that interventions aimed at changing this picture need to
consider the choices students make early on in their educational
career. A Level Economics is a key gateway to further study in
the subject, but access to and take-up of this qualification
varies substantially according to a student’s background. As a
result, improving representation within the economics profession
in the long-term must include steps to ensure young students
understand what the subject involves and the opportunities it
provides, and have the chance to study it before university.
Top incomes have grown rapidly in recent decades and this growth
has sparked a debate about rising inequality in Western
societies. This column combines data from UK tax records with
new information on migrant status to show that that migrants are
highly represented at the top of the UK’s income distribution.
Indeed, migration can account for the majority of top-income
growth in the past two decades and can help explain why the UK
has experienced an outsized increase in top incomes.
The future of UK economics is looking predominantly male and
disproportionately privately educated. This column introduces
#DiscoverEconomics – a campaign to increase diversity in
economics led by the Royal Economic Society and with the support
of a wide range of institutions involved in economic research,
communication and policymaking, including the Bank of England,
the Government Economic Service, the Society of Professional
Economists and many leading research institutions. The campaign
aims to attract more women, ethnic minority students, and
students from state schools and colleges to study the subject at
university.
