May 23, 2020
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Capital Gains and U.K. Inequality

Capital Gains and UK Inequality

Aggregate taxable capital gains in UK have tripled in past decades. These taxable gains are largely repackaged income, so their exclusion biases the picture of inequality.
In this paper, Arun Advani and Andy Summers include capital gains to fiscal income so as to study the implication for measured inequality over the past two decades. As a result, it changes who is at the top of the distribution by adding more business owners and older people. Moreover, the share of income plus gains (both pre- and post-tax) going to the top 1% is 3pp higher than for income only, and this gap has been steadily rising. The authors’ calculations are based on confidential administrative data on UK taxpayers.

Key results on capital gains in the U.K.

  • Capital gains are highly concentrated. Ranking people by their taxable gains, the top 5,000 people receive over half (54%) of all gains. For comparison, the top 5,000 people ranked by income receive just 2% of all income.
  • The majority of gains go to business managers rather than arms-length investors.
  • For some, capital gains are regular part of their remuneration. A third of those with gains over £20,000 in 2017 also averaged gains over £20,000 in the previous four years.
  • Gains are concentrated amongst those who already have high incomes. 9/10 people who were in the top 1% by total remuneration (including income and gains) were already in the top 1% by income only.
  • When capital gains are included, the one in ten people who “join” the top 1%, are older and more likely to be female. They are also more likely to be business owners and pensioners, rather than employees.
  • The top 1% share rises to 17% when including gains, compared with 14% based on income only.
  • The impact of capital gains on UK inequality peaked in 2008, coinciding with record reported gains on the eve of the Financial Crisis. Following a large fall in 2009, the scale of gains and their impact on inequality increased over the past decade. They reached their second-highest level in 2018.
  • The lower tax rates on capital gains relative to income mean that the tax system does not reduce the share of total remuneration to the rich as much as it does the share of top incomes.

>> Click here to access the WID data on UK income and wealth


In order to tackle the rise of inequality in the UK, Arun Advani and Andy Summers make 3 policy recommendations :

  • Measures of income inequality need to include capital gains: these are much more concentrated than income, and in the UK affect both the level and trends.
  • International comparisons of inequality need to be sensitive to national tax systems, which create different incentives for how remuneration is received and reported across countries.
  • Capital gains tax rates need to be aligned more closely with marginal income tax rates, since large gaps lead to repackaging of income, reducing the redistributive effects of tax, creating horizontal inequity, and biasing measures of vertical inequality.


The figure below illustrates the top shares of income and of total remuneration (capital gains + income) before and after tax.

UK capital Gains and Inequality - World Inequality Lab


Arun Advani, University of Warwick:
Andy Summers, London School of Economics:

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