Capital gains distribution

How the model uses capital gains¶

capital_gains_before_response is a person-level input, uprated through gov.economic_assumptions.indices.capital_gains, which follows OBR per-capita GDP growth unless a simulation supplies a CapitalGainsProjection (#2274; see the capital gains projection guide). capital_gains_tax charges capital_gains (these gains plus any behavioural response) at the main CGT rates, with three components charged at their own rates (all added by #1861):

• capital_gains_badr: gains qualifying for Business Asset Disposal Relief or Investors’ Relief, at the relief rate up to the lifetime limit;

• capital_gains_residential_property: gains on UK residential property, at the residential rates;

• capital_gains_carried_interest: carried interest, at the carried interest rates.

Each is a component of the total, not an addition to it.

Behavioural responses: capital_gains_behavioural_response changes realisations using an elasticity with respect to the retention rate (relative_capital_gains_retention_rate_change) or the marginal tax rate. Gains use gov.simulation.capital_gains_responses.elasticity, which is 1.0 by default (since #2419, October 2026), so a reform that changes a person’s marginal rate on gains changes their realisations unless a user sets it to 0; the capital gains realisation response page explains it. When gov.simulation.capital_gains_responses.separate_badr_elasticity is true (false by default), gains qualifying for BADR respond at badr_elasticity instead (1.4, the value the OBR used for these gains in its costing of the October 2024 rate rises, published in January 2025), through capital_gains_badr_elasticity.

How the gains are imputed¶

Enhanced FRS: one distribution per income band¶

The Enhanced FRS (policyengine-uk-data, the certified default until 21 October 2026) fits a spline to the Advani and Summers gains percentiles within each income band and draws each household’s gains from its band. The spline alone cannot produce gains above about £2m, so policyengine-uk-data also stacks 30 donor households for each HMRC size-of-gain band from £500,000 up (from £12,300 up before release 1.59.0) and calibrates to HMRC counts and amounts of gains by band. #818 asks for gains to be modelled across all income groups together rather than each group independently, to avoid overfitting. Fitting band by band means that:

• each band is fitted on its own, so the joint distribution of income and gains has breaks at band boundaries;

• two people in the same band draw from the same distribution however different their incomes;

• gains depend on income only, not on wealth, so they can be imputed to households with no assets (#817).

Microcosm UK¶

Microcosm builds gains in six stages (see the UK sources specification):

1. Support split (cgt_support_split). Within each income band of HMRC Capital Gains Tax statistics Table 3, the households with the most investable wealth (gross financial wealth, corporate wealth such as shares and investment funds, and property other than the main home) are split into lighter copies, so that there are enough rows to hold the largest gains.

2. Who might have gains (cgt_incidence_clone). Every household is cloned at half its weight, and the clone’s oldest adult draws a prior gain from the Advani and Summers (2020) gains percentiles for their income band (Capital Gains and UK Inequality, CAGE Working Paper 465).

3. How much (hmrc_cgt_gains_spine). Amounts are redrawn so that gains match HMRC Table 3 for 2024-25, which counts taxpayers and gains jointly by size of gain and taxable income, conditioned on Tables 1, 2.1a, 5 and 6. Within each income band, age group and region group, the largest gains go to the gainers ranked highest on household investable wealth (weighted three quarters) and the prior gain (one quarter).

4. Weight anchor (cgt_incidence_anchor). After the redraw, clones with gains at or below the annual exempt amount, or with losses, carry far more weight than the Advani and Summers reporter composition implies for the number of liable gainers (HMRC publishes no count of them), so the excess weight is moved back to each clone’s paired original.

5. Residential property (cgt_residential_split). Gains on UK residential property are fitted to Table 8 (2024-25 residential property disposals) by splitting households into weighted copies, which fills capital_gains_residential_property.

6. What kind (hmrc_cgt_asset_type_spine). Of the other liable gainers, those claiming BADR or Investors’ Relief are fitted band by band to Table 4.1, which fills capital_gains_badr. Every one of them is also given a main asset type from Table 7 (gains by asset type, 2023-24), for diagnostics only. Carried interest (HMRC Table 9) is not imputed.

All the HMRC tables come from the 2026 release of the Capital Gains Tax statistics (published 27 August 2026), through Microcosm’s pinned Chronicle feed.

Against #818: gains are now fitted to the published joint distribution of gain size and taxable income, not band by band. Against #817: within each income band, the largest gains go mainly to the wealthiest households, through the wealth-weighted ranking in stage 3. Microcosm’s release checks also include a projection check on people just below the annual exempt amount (uk_cgt_projection_entrants in gates.json), so that uprating does not push implausible numbers of them into paying CGT in later years.

What is left¶

• A zero-wealth test. Add a test, here or in Microcosm, that no positive gains sit on households with zero investable wealth. Neither repo asserts this directly yet, so #817 should stay open until it does.

• Close #818 once the certified Microcosm UK dataset’s diagnostics confirm the Table 3 fit (Microcosm UK has been the certified default since 21 October 2026); link them from the issue.

• Elasticities by group. Responses use one main elasticity and one BADR elasticity. With the joint distribution in place, an elasticity that varies by income or size of gain becomes possible, at the cost of more parameters to justify.

• Wealth source. Investable wealth comes from Microcosm’s Wealth and Assets Survey imputation. Its quality limits how well #817 can be met.

The quantile regression forest approach proposed here in May is no longer needed for this.

References¶

• Issues: #818, #817.

• CGT components: #1861.

• HMRC, Capital Gains Tax statistics.

• Advani, A. and Summers, A. (2020), Capital Gains and UK Inequality, CAGE Working Paper 465.

• Microcosm UK sources specification (stages cgt_support_split, cgt_incidence_clone, hmrc_cgt_gains_spine, cgt_incidence_anchor, cgt_residential_split, hmrc_cgt_asset_type_spine).

• OBR (2025), Costing of changes to the main, BADR and IR rates of capital gains tax.