Incomes· Inequality & poverty· Wealth & assets· Tax Who gains? The importance of accounting for capital gains 21 May 2020 Adam Corlett Arun Advani Andy Summers Capital gains (the profits from disposing of an asset for more than it was worth when you acquired it) are generally excluded from analysis of incomes in the UK, despite being a significant driver of some people’s lifetime living standards. This report looks at what we know about taxable capital gains; how our understanding of top income shares changes if we include capital gains in our analysis; and whether definitions of income used in official statistics should be changed or supplemented. Capital gains matter for a number of reasons. They’re big. They’re concentrated among a relatively small number of people. They have varied significantly over time in response to both economic and tax policy changes. And they are often interchangeable with other forms of income that are included in existing income statistics. Around half of all taxable capital gains now relate to people’s occupations, rather than the traditional stereotype of gains made on arms-length investments, but neither our income statistics nor tax policy have kept pace with this development. We show for the first time that the choice of whether capital gains are counted as ‘income’ or not has a material impact on statistics about the top of the individual income distribution, and therefore inequality. Top income shares are greater, and their rise in recent decades more pronounced, when capital gains are included. The fact that people can (and do) choose to receive income in ways that existing statistics ignore is problematic for our understanding of income levels, distributions and trends. But this is an exciting time for UK statistics, with an increasing use of administrative (rather than purely survey) data. This opens the door to the use of Capital Gains Tax records to incorporate taxable capital gains into income statistics. We conclude that income statistics should not be rigidly tied to concepts of ‘taxable’ income or ‘regular’ (i.e. not one-off) income. We make recommendations for supplementary statistics that capture a broader range of income, and to increase the availability of data so that the impacts of definitional choices – which make a big difference to our understanding of 21st Century Britain – can be made more transparent.