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Chancellor Rachel Reeves’ upcoming Budget threatens to push the UK towards one of the least competitive tax systems in the developed world, according to a major new analysis from the US-based Tax Foundation and the UK Center for Policy Studies (CPS ).
The report warns that if Labor implements a widely expected increase in capital gains tax, Britain could fall further in the Organization for Economic Co-operation and Development’s (OECD) tax competitiveness rankings.
As a result of the measures taken by the previous government, Britain has already fallen to 30th out of 38 OECD countries in the Tax Foundation’s International Tax Competitiveness Index 2024. However, the research shows that further tax increases under Ms Reeves could see Britain drop a further four to five places, leaving it just ahead of France, Italy and Colombia in the overall rankings.
Daniel Herring, a researcher at the CPS, warned: “There is a real danger that Britain could end up with one of the least competitive and most anti-growth tax systems in the OECD if the expected tax increases come to fruition in the budget. If Labor really wants long-term economic growth, it must consider fundamental tax reform, rather than just raising taxes.”
Concerns about capital gains and dividend tax increases
The analysis focuses in particular on possible increases in capital gains tax and dividend tax. The CPS has modeled the impact of these measures, showing that increasing capital gains tax could drop Britain’s ranking to 32nd to 34th. Similarly, raising the higher dividend tax rate to 45% to bring it into line with income tax would drop Britain two places to 32nd. If both changes are combined with a discussed wealth tax, Britain could drop to 35th, fourth bottom in the OECD rankings.
These changes are considered part of Ms Reeves’ wider tax reform agenda, which aims to raise £35 billion in new revenue. Although a wealth tax has reportedly been ruled out, stricter measures on capital gains tax and inheritance tax appear likely. The Chancellor would review the business and agricultural exemptions offered under inheritance tax, which currently provides a 50% exemption on the value of property and land.
Threat of brain drain and market destabilization
Wealth advisers warn that the proposed tax changes could lead to a ‘brain drain’ as business owners consider moving abroad to avoid punitive taxes. Jason Hollands, managing director of Evelyn Partners, highlighted that many entrepreneurs are already exploring options to become non-resident if the UK tax environment becomes too hostile.
“There is a risk that we end up exporting many of our entrepreneurs abroad, undermining the economy of job creators,” Hollands said. He noted that his company is already in numerous discussions with clients exploring the possibility of leaving the United Kingdom in response to potential tax increases.
In addition to the possible exodus of entrepreneurs, analysts have raised concerns that changes to inheritance tax, particularly on Aim-listed shares, could destabilize investment markets. Mr Hollands pointed out that removing Aim’s corporate support could have a significant impact on the market, as a large part of Aim’s investments are linked to tax reduction strategies. He warned that lifting business support without transitional arrangements could lead to a wave of sell-offs, further weakening the stock market.
“Aim is already struggling with a shortage of IPOs and a decrease in the number of listed companies. Removing support for the business community would be a real hammer blow, especially if existing shareholders have no incentives to persevere,” says Hollands.
Mixed messages on the pro-growth agenda
The potential tax hikes come at a time when the government is promoting itself as pro-growth. A Treasury spokesperson pointed to the record £63 billion in private investment secured at the recent International Investment Summit as evidence that Britain remains a top destination for business investment. They added that Ms Reeves’ Budget would continue to support businesses by capping corporate tax at 25% and publishing a business tax roadmap to provide long-term certainty for businesses.
However, mid-sized companies remain concerned about the impact of the budget. A recent survey by accounting firm BDO found that many of the 500 companies surveyed were concerned about rising costs and a lack of clarity about government policy. Richard Austin, partner at BDO, said: “These companies are crying out for some certainty.”
As the UK government walks a fine line between raising revenues and maintaining competitiveness, the upcoming Budget will be crucial in determining whether Britain can balance its growth ambitions with a tax system that supports businesses and entrepreneurs .