Capital gains and inheritance tax raid now more likely, experts warn

Tax hikes targeting wealth have become more likely because of the spike in the UK’s borrowing costs, experts have said. Economists and City figures warned that Andy Burnham and his Chancellor John Healey would have to raise taxes by up to £15bn in the Budget to restore depleted fiscal buffers. One even claimed the Prime Minister faced a Liz Truss-style “market meltdown” unless he got a “grip” on the UK’s bond prices. Shorts The borrowing costs of governments around the world have jumped in recent days after renewed hostilities between the US and Iran pushed up energy prices, leading to expectations that inflation, and therefore interest rates, will be higher for longer. Why Britain’s cost of borrowing is higher While the phenomenon is global, Britain’s cost of borrowing is higher than many comparable economies, with the country seen as particularly vulnerable to elevated gas prices and questions still lingering about how Burnham will manage the public finances. The interest rate on UK government bonds – known as “gilts” – has hit levels not seen in decades. The rate – or “yield” – on 10-year gilts is at its highest level since 2008, while the yield on 30-year gilts is at its highest since 1998. This essentially makes it more expensive to service Britain’s debt. Economists said that higher debt interest payments would eat into the “headroom” – the spare cash which the Government holds against its fiscal rules – by as much as £15bn, meaning Burnham and Healey will likely have to raise taxes in the Budget on 28 October. At the same time, Healey will have to find money to cover a £4.7bn gap he was left by his predecessor Rachel Reeves in the funding of the Defence Investment Plan, as well as set out the detail of how cost of living support measures such as cutting VAT on electricity bills will be paid for. Professor Edward Jones, senior lecturer in economics at Bangor University, told The i Paper that “further fiscal tightening” – tax rises or spending cuts – in the Budget “is now increasingly likely if borrowing costs remain around current levels”. “The combination of higher debt-interest costs, relatively weak growth and limited existing fiscal headroom makes further action increasingly difficult to avoid.” ‘£10-£15bn may be required’ He said that “somewhere in the region of £10–15bn” may be required, “although I would not expect all of that necessarily to come through higher taxation”. Ruth Gregory, the deputy chief UK economist at Capital Economics, told The i Paper: “Back in March, the Chancellor [Reeves] had headroom of £24bn against the main fiscal rule [requiring day-to-day spending to be covered by tax receipts by 2029-30]. “Since then, the rise in market interest rates have reduced this headroom to about £15bn. And that’s before considering the adverse effects on the public finances of weaker real gross domestic product growth and higher inflation caused by the energy shock, which could reduce the headroom to between £10-15bn.” She went on: “Much will depend on market movements in the weeks leading up to the Budget on 28 October. But as things stand, this may mean Chancellor Healey is caught in the same headroom trap as Reeves and needs to cut government spending and/or raise taxes by something like £9-14bn to restore headroom and maintain fiscal credibility.” ‘Additional taxation of banks is a contender’ Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “We think the Chancellor’s headroom has fallen to £12bn and he will need to raise taxes or cut spending by at least £12bn to restore the headroom. Any further spending commitments would require more action.” Jones said that because Burnham had pledged to stick to Labour’s 2024 manifesto commitments not to increase income tax, national insurance and VAT, Healey had a narrow set of options. “Additional taxation of banks is an obvious contender given the current political discussion, alongside further measures affecting wealth and high-value property,” he said. “However, I would be cautious about assuming that any one of these can painlessly raise the sums required.” Capital Economics has also suggested that tax increases could be “tilted” towards capital and wealth, pointing out that the Government had not ruled out raising capital gains tax (CGT), increasing the bank surcharge, changing the taxation of pensions or hiking inheritance tax. Options on pensions including changing the tax-relief on pension contributions and changing the rules on how big a lump sum can be taken from a pension pot before it is taxed. Capital gains tax is paid on the profits of a sale of assets, such as a second home. Burnham refuses to rule out tax increases At his first Prime Minister’s Questions on Wednesday, Burnham was pressed by the Conservative leader Kemi Badenoch on what he would do about the increase in borrowing costs. Burnham refused to rule out tax increases and insisted the Government is “taking the action needed to get debt down”. “This will be a Government grounded in fiscal responsibility,” he said. “We will stick to the fiscal rules, but at the same time we will help to reduce cost of living pressure on our constituents.” He also said that the Government needed to “get the welfare bill down”. The Prime Minister’s official spokesman said that Healey and Burnham were “in lockstep that the Government will meet the fiscal rules with a buffer against uncertainty”. However, he refused to be drawn on whether Healey would aim to replicate the £24bn of headroom which Reeves gave herself at the last Budget. “The Office for Budget Responsibility will publish its updated forecast alongside the Budget in October,” he said. “We won’t comment on every rumour, speculation, or proposals about its contents ahead of them.” Nigel Green, the chief executive of the wealth management firm, deVere Group, warned that Burnham “needs to get a grip on gilts before Britain faces another Truss-style market meltdown”. He claimed that the Prime Minister had unsettled the bond market with recent talk of taking “strong public control” of essential services. “Every time Burnham opens his mouth on spending, fiscal rules or public ownership, gilts flinch,” he said. He added that Healey is “staring down tax rises, spending cuts, or both, worth something in the region of £10bn a year, just to convince investors the sums still add up”. The Treasury was contacted for comment.