Key Points Potential Labour leader Wes Streeting has proposed aligning the capital gains tax rate with the higher and additional rates of income tax. Streeting has termed this measure a "wealth tax," though strictly speaking, the concepts are not identical. Even so, implementing such a policy remains fraught with difficulties. A conventional wealth tax, as favored by some Labour members, also faces major implementation challenges. Should current Prime Minister Keir Starmer face a leadership challenge, Labour members would vote for a new party leader.

On Monday, August 21, 2023, multiple mansions in London's Kensington and Chelsea boroughs. The UK's mortgage crisis continues to intensify, forcing sellers of high-end London properties to reduce prices or risk deals falling through.

The UK's ruling Labour Party has not formally begun a leadership contest, but internal jockeying has already started. Former Health Secretary Wes Streeting has stated that if elected leader, he would introduce a wealth tax. He said in an interview last week: "We need an effective wealth tax. Income earned simply from holding assets should not be taxed less than income earned from a hard day's work." Strictly speaking, Streeting is not proposing a conventional wealth tax; his core proposal is to equalize the rates for capital gains tax and income tax. Currently, individuals paying the higher and additional rates of income tax in the UK face marginal rates of 40% or 45% on earned income. However, capital gains above an annual allowance of £3,000 (approximately $4,000) are taxed at just 24% (with an exemption for a primary residence). Gains from carried interest are taxed at 32%. Streeting cited research from the centre-left think tank Tax Justice Network, suggesting that aligning the rates could generate an additional £12 billion annually for the UK Treasury. This projection appears overly optimistic. Asset holders can easily avoid capital gains tax by simply choosing not to sell their assets. Furthermore, capital gains tax liabilities are extinguished upon the owner's death, though inheritors may then face the UK's 40% inheritance tax.

Times Have Changed The proposal to align the two tax rates is not new. Current Chancellor of the Exchequer Rachel Reeves advocated for it in a 2018 pamphlet. There is also historical precedent. The reformist Chancellor Nigel Lawson equalized income and capital gains tax rates in 1988, arguing it would make the tax system more neutral and align it with corporate tax rules. The key difference today is that the top rate of income tax is significantly higher. Setting capital gains tax at 40% to 45% would make it the highest rate in Europe, likely prompting an exodus of wealth creators. This trend is believed to have already begun when Reeves abolished the non-domiciled tax status for overseas trusts in October 2024. Another major drawback of such a policy is that a portion of capital gains is often attributable to inflation, which is a key historical reason capital gains tax rates have been lower than income tax rates. For years, successive UK chancellors have introduced various reliefs and allowances designed to tax only real gains, adjusted for inflation. There is also an argument that capital gains often result from economically risky activities like entrepreneurship and job creation, which deserve a lower tax rate.

Regarding a conventional wealth tax, the current government has already implemented several measures targeting higher earners: increasing the capital gains tax rate on carried interest, abolishing the non-dom tax status for overseas trusts, and raising the dividend tax rate. The UK also plans to introduce a "Mansion Tax" in April 2028, targeting residential properties valued over £2 million. Simultaneously, the UK's inheritance tax rate is among the highest in Europe. However, polls indicate that a majority of Labour members, who hold votes in a leadership contest, still support a direct tax on assets—a conventional wealth tax. Yet, experience across multiple European countries has shown such taxes to be problematic: most European nations have abolished wealth taxes in recent decades, and France has significantly narrowed its scope. The actual revenue from such taxes often falls far short of expectations. Implementation is the primary challenge: it requires regular valuation of assets like private businesses, pensions, and property, for which the UK's tax authority currently lacks the necessary administrative framework. Denis Healey, Labour Chancellor from 1974 to 1979, wrote in his 1989 memoir: "We had committed ourselves to a wealth tax; but in five years I found it impossible to draft one which would yield enough revenue to be worth the administrative cost and political hassle." Nearly half a century later, any chancellor attempting to introduce a wealth tax today would likely find themselves in a similar predicament.