Bottom Line Up Front: Chancellor Rachel Reeves faces a £51bn budget deficit and is eyeing wealth taxes to fill the gap. But experts warn that hiking capital gains tax further could devastate the UK's M&A market and actually reduce government revenue.
The numbers tell a stark story. Despite slashing the annual CGT allowance from £12,300 to just £3,000 and raising rates to 24% for higher earners, HMRC's CGT receipts fell 18% in 2023-24. Now, with Business Asset Disposal Relief set to rise from 14% to 18% in April 2026, the Chancellor risks creating a perfect storm that could crush entrepreneurial activity just when Britain needs it most.
The Wealth Tax Menu: What's Really on the Table?
While Keir Starmer refused to rule out a wealth tax during Prime Minister's Questions in July, the government appears to be assembling a comprehensive assault on accumulated wealth.
The options being debated include:
A Full Wealth Tax: Tax Justice UK proposes an annual 2% levy on assets over £10 million, potentially raising £24 billion yearly. The Unite union suggests a 1% tax on wealth above £4 million for £25 billion in revenue. These figures assume wealthy individuals won't simply relocate—a risky assumption given the non-dom exodus already underway.
Property-Based Wealth Taxes: Labour has previously championed a "mansion tax" on properties worth £2 million or more. This targeted approach could be politically easier to sell than a comprehensive wealth tax, though it risks distorting the property market further.
CGT Alignment with Income Tax: The most discussed reform would align CGT rates with income tax, potentially pushing the top rate from 24% to 45%. This seemingly logical step could prove economically catastrophic.
The CGT Paradox: Why Higher Rates Mean Lower Revenue
Capital gains tax suffers from a fundamental flaw—it's essentially voluntary. Unlike income tax or VAT, CGT only applies when someone chooses to sell an asset. Raise the rate too high, and rational actors simply stop selling.
Peter Mardon from WSP Solicitors reports that clients are already gaming the system, either rushing to sell before April 2026 or planning to wait until 2029 for a potentially more business-friendly government. This behavioral shift threatens to create a CGT revenue cliff precisely when the Treasury needs the money most.
The M&A market, already subdued by economic uncertainty, faces further pressure as business owners defer exits. This creates a vicious cycle: fewer transactions mean less CGT revenue, forcing the government to consider even higher rates or alternative taxes.
The Double Death Tax Threat
Perhaps the most controversial proposal floating around Westminster is the "double death tax"—applying CGT on assets at death before inheritance tax kicks in. Currently, capital gains are wiped clean when someone dies, with beneficiaries inheriting assets at current market value.
Under the proposed system, death would trigger CGT at up to 24% on gains from purchase to death, followed by the standard 40% inheritance tax on the net estate value. Combined with the confirmed inclusion of pension funds in inheritance tax from April 2027, wealthy families could face effective tax rates exceeding 60% on some assets.
This isn't theoretical speculation. Pension funds will definitely become liable for inheritance tax in 2027, creating a genuine double tax when beneficiaries draw down funds and pay income tax at their marginal rate.
The Revenue Reality Check
The government's desperation is understandable. With weak economic growth, high borrowing costs, and limited scope for spending cuts, taxing wealth appears politically safer than hitting working families. But the numbers suggest this strategy is fundamentally flawed.
CGT's 18% revenue drop despite higher rates and lower allowances demonstrates the tax's inherent instability. Wealthy individuals have options—they can delay sales, restructure investments, or simply leave the UK entirely.
The non-dom regime changes have already triggered an exodus to more tax-friendly jurisdictions like Portugal, Spain, and Monaco.
The Entrepreneur Exodus Risk
Britain's entrepreneurial ecosystem, already struggling with post-Brexit uncertainty and regulatory burden, faces another blow. The planned increase in Business Asset Disposal Relief from 14% to 18% sends a clear signal that the government views successful business builders as revenue sources rather than economic drivers.
This short-term thinking could prove disastrously counterproductive. Entrepreneurs create jobs, drive innovation, and generate substantial income tax revenue through employment. Deterring business formation and exit activity through punitive CGT rates risks long-term economic damage for short-term fiscal gain.
International Competition Heats Up
While the UK contemplates wealth taxes, competitor nations are moving in the opposite direction. France abolished its wealth tax on all assets except real estate after watching wealthy residents flee to neighboring countries. Spain's wealth tax remains, but savvy residents can easily establish fiscal residence elsewhere in the EU.
Countries like Portugal, Cyprus, and Malta actively court high-net-worth individuals with favorable tax regimes. As these jurisdictions become increasingly sophisticated in their offerings, Britain risks becoming a launching pad rather than a destination for successful entrepreneurs.
The Way Forward: Learning from Failure
The evidence is clear: higher CGT rates don't reliably generate higher revenues. Instead of pursuing this flawed strategy, the government should consider fundamental reform that encourages rather than penalizes productive economic activity.
Options might include indexing CGT for inflation, introducing taper relief for long-term holdings, or creating specific exemptions for productive business investment. These reforms would sacrifice some short-term revenue potential for sustainable, long-term economic growth.
A Moment of Truth
Chancellor Rachel Reeves stands at a crossroads. She can pursue the politically expedient path of soaking the wealthy through higher CGT and wealth taxes, risking an economic exodus and revenue shortfall. Or she can embrace reform that encourages investment, entrepreneurship, and long-term economic growth.
The stakes couldn't be higher. With a £51bn deficit and limited borrowing headroom, the Chancellor has precious little margin for error. The question isn't whether she can afford to raise taxes on wealth—it's whether Britain can afford the consequences of getting it wrong.
The 2025 Autumn Budget will reveal which path she chooses. For entrepreneurs, investors, and high-net-worth individuals, the time to plan for either outcome is now.
This analysis is based on publicly available information and speculation.
Tax planning should always be undertaken with qualified professional advice based on individual circumstances.
