Rachel Reeves faces £23 billion capital gains tax “black hole” – will she be forced to look elsewhere?

Chancellor Rachel Reeves could have less money to play with than previously expected when it comes to capital gains tax (CGT) revenues.

In a report published alongside the Spring Statement on Wednesday, the Office for Budget Responsibility (OBR) downgraded its five-year CGT forecast by £23 billion.

Downgrades have been made in every year of the forecast period and range from £2.4 billion to £5.5 billion in scale.

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The fiscal watchdog attributes the largest downgrades, which take place from 2027 onwards, to “updated data on the composition of liabilities”, as well as changes to the way carried interest is taxed.

From April 2026, carried interest (a form of performance-related pay common in the investment industry) will be taxed as income rather than capital gains.

But Charlene Young, senior pension and savings expert at investment platform AJ Bell, suggests the downgrades could also have something to do with Reeves’s decision to hike CGT rates at last year’s Autumn Budget.

Young refers to the Laffer Curve – a theoretical model in economics which shows the relationship between tax rates and tax revenue. This model suggests that hiking tax above a certain “sweet spot” alters investor behaviour to the point that revenues drop.

This could take many forms, including delaying taking capital gains or even avoiding them entirely, holding onto assets instead.

“The theory was one of the reasons the rumoured equalisation of income tax and capital gains tax rates didn’t materialise in October,” Young says.

“The government’s own figures showed that [doing this] would have meant a total loss of £2.05 billion for the Exchequer by 2027-28.”

CGT forecasts downgraded by £23 billion

HMRC is now expected to collect £121 billion in CGT over the next five years, down from previous estimates of £144 billion. AJ Bell has referred to the shortfall as a £23 billion “black hole”.

Despite being revised down, CGT receipts are still expected to almost double over the next five years – from around £13 billion in 2024/25 to £26 billion in 2029/30.

^{Source: Office for National Statistics, Office for Budget Responsibility}

Will Reeves be forced to tax elsewhere?

Even after the downgrades to CGT, the forecast for total tax revenues was largely unchanged compared to October.

Despite this, economists have argued that Reeves will struggle to avoid tax hikes in the 2025 Autumn Budget – particularly given high borrowing costs, weak economic growth, and urgent spending requirements.

“The UK's public finances are operating on increasingly fine margins, and we don't think that defence will be the only department requiring fresh cash injections over the coming years,” said James Smith, developed markets economist at financial institution ING.

“In the absence of further upgrades to GDP growth or a fall in gilt yields, we think this is likely to necessitate further tax hikes.”

Although the OBR upgraded its growth forecasts for 2026-2030, Smith points to a “widespread perception that it was sceptical about the growth-enhancing qualities of the government’s recent announcements”.

He thinks the OBR could be forced to “throw in the towel” and cut them back at some point.

Having ruled out hikes to income tax, employees’ National Insurance and VAT during the general election, the government has backed itself into a corner.

Ultimately, it could be forced to consider policies like tightening inheritance tax gifting rules, cutting the annual cash ISA allowance, or freezing income tax thresholds beyond 2028.