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The history of UK capital gains tax in five charts

The history of UK capital gains tax in five charts

June 18, 2026

This article looks at the history of UK capital gains tax, and how revenues have changed when the rate and rules changed. There’s a separate article on reforming CGT here.

The chart at the top of this page shows what happens if you plot UK capital gains tax revenues as a % of GDP since 1978. It looks like somebody having a heart attack.

Income tax revenues, by contrast, look much more sensible:

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What on earth is going on?

Politicians fiddling with the rules. Again and again. We start to see it if we overlay the rates:

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When the rate is about to go up, people accelerate their sales to benefit from the current lower rate. When the rate is about to go down, people delay their sales until the rate has dropped. I went into some of the history of CGT here.

One important caveat to bear in mind throughout: these charts plot tax receipts – the year the money actually reached HMRC. CGT is mostly paid by the 31 January after the end of the tax year, so the figures lag the underlying disposals, often by a year or more. The huge 2025-26 figure, for example, largely reflects gains made in 2024-25, including a rush to sell ahead of the October 2024 rate rise.

But that doesn’t explain all the peaks in the chart. For that we have to overlay all the constant messing around with the details of the rules:¹

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At this point some people can get very excited about the Laffer curve, and how the lower rates incentivised economic activity. I’m unconvinced. Even out the peaks and troughs and it’s not obvious there was any net change between 1978 and 2016. And, given the constant changes, it’s not obvious how any rational businessperson could make decisions based on the rate at the time.

Some other people get very excited about the impact on inequality. I’m unconvinced. Put CGT and income tax onto the same chart, and we see quite how unimportant CGT is, and will always be (regardless of rate):

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My view: the current system is dysfunctional. The large gap between the income and capital gains rates creates an unfortunate incentive to convert income (taxed at 45%) into capital (taxed at 20%). On the other hand, there’s no allowance for inflation, so long term investors find themselves taxed on a return that isn’t real. Rewarding avoidance and punishing long-term investment is not a rational outcome.

If some idiot made me Chancellor, how would I fix this?

I’d close or eliminate the gap between CGT and income tax rates, but bring back the “indexation allowance” that stops inflationary gains from being taxed. Nigel Lawson got this right in 1988.
I’d make the change immediate, to prevent a sudden spike in disposals.
And then the important bit: I’d make a big show of announcing I wasn’t going to change any of the CGT rules for the rest of the Parliament. I’d resist the urge to keep bloody changing the rules, and enable investors and entrepreneurs to plan for the long term.

I wrote in more detail about the dysfunctional history of CGT, and the approx £8bn that could be raised by equalising rates, here.

Footnotes

This is greatly simplified. The number of changes when Gordon Brown was Chancellor were particularly egregious ↩︎

Charlie

February 21, 2024 11:01 am

It seems to me that there are four different categories of CGT exposure and each needs a different treatment.

For most of us who own chargeable capital assets, we buy, hold and
ultimately sell. I suspect that this category is high on compliance cost and
low on yield. An indexation allowance should take most of those gains out
of tax. Perhaps a lifetime limit as we have for BADR/ER.

My second category is for the few: those who obtain substantial planning
gains on land, value which is given to them by the community. Such gains
should be more heavily taxed than the present 20% or 28% as the case may be,
albeit s106 and CIL often grabs a good share. Compliance cost here is
relatively low, those that pay tax on such gains are usually well advised.
Yield is high. Land supply for housing is not in point: I doubt that many
making such gains who currently accept a 20% charge would not make their
land available at a significantly higher rate: the planning gains are often
enormous.

Third are the entrepreneurial gains, realised by founders and others who
probably invested little money (so that indexation is useless) but invested
heavily in blood sweat and tears. BADR relieves such gains, whether the
maximum cash value of £100k is a sufficient thankyou from society is one
question, whether the 20% rate is sufficient is another. But often that 20%
is imposed on what’s left after income taxes. As with the second category,
compliance costs are relatively modest, few make such gains, but yields are
usually high. Overall what we have now feels about right to me.

My fourth, the carried interests of individuals piggybacking on the
firepower of private equity and the like, I know little about but can’t help
agreeing with those who want to see such gains charged to income tax.

Reply
Bob Owen

February 12, 2024 8:51 am

One other thing that I think is wholly unfair is the extra allowances that people with mixed incomes get. This is particularly generous for capital gains.
There should only be one set of allowances, most people only benefit from one (or two if they have savings).
Failing that, the GCT one should be massively reduced.

Reply
1. David
  
  February 15, 2024 5:49 pm
  
  I don’t disagree in principle on a single set of allowances, but would note that the CGT exempt amount has been halved for this tax year, and will halve again next.
  
  Reply
James Smith

February 10, 2024 11:32 pm

Meanwhile in Australia CGT is taxed at your marginal income tax rate. But you get a 50% discount to allegedly address the long-term inflation component of any gain.

We can avoid CGT upto a limit by transferring capital gains to a compulsory superannuation account. Deposits taxed at 15% and future income is tax free.

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david

February 10, 2024 9:44 pm

You fail to mention that income taxes on a base rate of GBP / YEAR where as capital gains is just “PNL” and no “per year” and no reference to starting capital. It makes no sense. Let alone no inflation adjustment. Buy and hold for 100 years? Doesn’t matter. PNL in the year of sale. Makes no sense.

The natural things are labour income rate (per second, per hour, whatever) and CAGR (log(sell price / buy price) / TIME HELD).

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David Mead

February 10, 2024 5:25 pm

The difference in the taxation of gains v income has probably done more to encourage the quest for the ‘accountants stone’, an obscure branch of alchemy turning income into capital.
Entrepreneurs relief addresses the double tax point. Retained profits have already been taxed, so ‘not fair’, to tax them again. Politically popular, it would make more sense if the rates of income tax and CGT were aligned.
Why aren’t they aligned? probably because those holding capital are better able to manage their affairs to benefit from lower tax rates than those less fortunate and they make the rules.
Do tax incentives reward entrepreneurship? No . They reward those who are able to exploit them and give the politicians something to talk about in their usual meaningless way

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Peter Langton

February 10, 2024 4:49 pm

Totally agree that CGT has been a mess over the years, but do not agree with indexation unless we also index income.
Taxing inflation is just as “unfair” for income as it is for assets.

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Clive Borthwick

February 10, 2024 1:18 pm

Not sure that I agree with Gerry. I am a retired commercial solicitor-when bringing in executives with small shareholdings was helpful to say that ER would be of help to them, particularly if they got in early when share value was v low or had EMI or other options that helped(provided fitted in with ER rules which was not always possible!)

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Phil

February 10, 2024 1:02 pm

Since it is of low importance in the grand scheme of tax revenues, it’s important that it should be fair and that means treating capital gains at the same rate as income gains – with, of course, due allowance for inflation.

Reply
Bob Owen

February 10, 2024 1:02 pm

Why should indexation apply to CGT and not to interest earned on cash savings or dividends?

Reply
1. Dan
  
  February 11, 2024 9:13 pm
  
  yes, this one’s tricky! Because reasons.
  
  Reply
Wendy Nicholls

February 10, 2024 1:01 pm

Yes! Agree with all of this. Meanwhile further guidance about what is a capital gain / badges of trade at the same time. Repeated buying and selling of business investments, or real property, is a trade.

The only slight complexity I can see with an immediate effect provision for the new equalisation policy is that full indexation would have to apply to all disposals after D day. But that complexity would be worthwhile.

Reply
Bob Owen

February 10, 2024 12:51 pm

Isn’t putting income tax and CGT on the same graph and saying that it doesn’t affect inequality because income tax swamps CGT a bit misleading.
Surely the important point is that income tax swamps CGT because most people pay it as they have no choice.

However, the people getting more or most of their income from CGT are probably much more wealthy on average and have higher incomes, which is where the inequality comes from.
It is not the overall take of each tax that matters, but the fact that the CGT rate allows many very wealthy people to pay a much lower tax rate than people with much lower overall income.

Reply
1. Dan
  
  February 11, 2024 9:13 pm
  
  I think we need to distinguish “equity” (which is I think your point) with “inequality”, an objective measure that won’t be much dented by whatever we do to CGT
  
  Reply
  1. Bob Owen
    
    February 12, 2024 8:36 am
    
    So, your point is that CGT only brings in a small amount, so overall it doesn’t give you much to redistribute and address inequality.
    However, inequality doesn’t generally appear overnight, any mechanism that allows even a small number of people to reduce their share of tax and increase their share of wealth unfairly (with nothing to stop it), will eventually lead to large inequalities. Particularly when their income is proportional to their wealth. Any unbounded positive feedback loop will eventually kill a complex system.
    Of course the biggest issue on this front is the increase in wealth through unrealised gains. Tackling that would require massive changes, but any mechanism where liquid income comes from (or is backed by) the unrealised gains must be taxed fairly.
    
    Reply
P gold

February 10, 2024 12:13 pm

The Risks of investing rather than just leaving cash in the bank do need a lower tax rate.
If we expect someone to risk their family house or give a personal guarantee for lending to grow a business and the economy they need some incentive.
We could end up with a nation playing it safe, wanting to work in the public sector.

Reply
1. Dan
  
  February 11, 2024 9:12 pm
  
  take a risk, hope to get a higher return. I don’t see what tax has got to do with it.
  
  Reply
  1. P gold
    
    February 29, 2024 7:17 pm
    
    We need to encourage individuals to have ambition and to grow the economy. Reducing the tax increases the ROI and appetite. Why would anyone start a business to pay 45% tax on exit if you are one of the lucky ones to not fail. You would be better off employed and not be a risk taker when most businesses fail in the first few years. It’s a shame we don’t have enough tech start ups in this country or they list overseas.
    
    Reply
Teddy

February 10, 2024 11:22 am

Indexation was removed as a simplification. With ever more people brought into assessment due to the lower allowance, this admin burden needs to be weighed accordingly with any idea of taxing capital and income at parity

Reply
1. Dan
  
  February 11, 2024 9:12 pm
  
  I confess I never really understood that, at least not in the modern world. Self-assessment software (HMRC’s or third parties’) should be able to calculate indexation in a moment given the base cost/expenses and dates
  
  Reply
David T

February 10, 2024 11:03 am

Very neat and tidy.

But what about the effect on investment incentives, where you can make a loss as well as a profit, whereas you can only (mostly) make a profit on selling your labour?

For me, I’m less inclined to seek out investments for gain if 40% of the profit goes to HMG.

Reply
Gerry Brown

February 10, 2024 10:59 am

Indexation relief is a ‘must’. Why do we have Entreprenuers’ Relief? (and why did we have ‘Retirement Relief’?) Do/did these reliefs actually encourage entrepreneurship? They usually applied at the end of a business relationship with its owner not at the beginning when a tax ‘break’ would be more useful.

Reply
Fay Chilcott

February 10, 2024 10:44 am

Another fascinating article by Dan. I only wish there were more people like him to enlighten us on the arcane world of finance.

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Mark B

February 10, 2024 10:40 am

Controversial take here, but I believe the optimum CGT rate is zero. Two reasons:

1. The economy benefits from capital being made available as readily and cheaply as possible. If the rate needed by an investor to compensate for the risk of putting capital at risk is x, the price at which he or she can justify making it available to a firm is x plus y, where y is the rate of tax levied on capital gains. Unless y is zero, the cost of that capital to a firm, z, is higher than x. We want the rate to be as low as possible, both to reduce the drag on firms and to maximise the number of projects meeting the hurdle rate. So y should be zero;

2. A perfectly efficient market for capital is a highly liquid one. Let’s say I hold £100k of Tesco shares (bought years ago for half that sum), believe the management team is pursuing the wrong strategy and think the Sainsbury’s leadership is doing better. There should be no barrier to me selling TSCO and buying SBRY. If I make that switch, I don’t become any wealthier. So why tax me? All it does is deter what would otherwise be an economically rational decision.

I accept that any delta between income and capital gains tax rates may encourage people to present income as capital gain, with equity participants in the general partnerships of private equity firms being the principal beneficiaries. This is indeed unfair. But I believe there’s another, better, way to deal with it. When a person has an opportunity to purchase equity on terms unavailable to the general public as a consequence of their employment, this is clearly a form of disguised remuneration. Tax the delta between the acquisition price and the market one at the individual’s marginal rate.

This same approach should apply to LTIP schemes for senior executives.

Reply
1. Dan
  
  February 11, 2024 9:11 pm
  
  in theory I agree with you, but in practice the opportunities for avoidance are just too great…
  
  Reply
2. Richard B
  
  February 12, 2024 11:16 am
  
  I quite agree with your second point. If the same portfolio changes were made within a fund, there would be no CGT, but there will be when held directly as individual shares.
  
  As an aside, the media, for example, have almost all referred to the PM’s tax summary as ‘income’, with the implication that Capital Gains are going to be used as spending money in the same way as other income, rather than being reinvested. They don’t query what the proceeds and initial costs are, or any losses, which would of course be available on the actual return if that were revealed.
  Back to the main point. Although I don’t have anything like 100K of Tesco, the main reason I realise any gain is to move unsheltered holdings to an ISA. That used to be fairly easy to do within the 12K gain allowance, but with the lower allowance almost impossible to do without paying some CGT.
  Also if there’s a company takeover for cash, there’s no escape, even if the proceeds will be invested in, er, ‘British’ companies.
  
  Reply
David Campbell

February 10, 2024 10:23 am

Vote for Dan!

Less flippant comment: have you engaged with any of the main political parties about this, or tried to? If they are serious about economic growth and reducing inequality (or perceived inequality) they should want to take this seriously. You’re now a properly respected think thank, you should at least get a hearing. And I’d be interested to know how they react.

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Alan McCrae

February 10, 2024 10:10 am

At last. Common sense on CGT. Having advised on tax for 30 years I couldn’t agree more!

Reply