As the UK approaches its next general election, a lot of attention has focused on Capital Gains Tax (CGT) and the possibility that it will increase.
The potential change of Government is likely to cause a shift in tax policy. The details of what this will mean are currently unclear. However, we explore why CGT may be particularly vulnerable to an increase in its tax rates.
The current regime
CGT is calculated on the uplift in value of most assets and is charged once assets have been disposed (broadly calculated as proceeds received less costs of acquisition).
Currently, the CGT annual allowance is £3,000 per individual per year, this is the amount of gains each tax year that can be realised free of CGT. This has been reduced significantly as it used to be at a level of £12,300 in the 2022/23 tax year.
Capital gains (net of capital losses) in excess of the annual exemption, are charged at 10% (basic rate taxpayers) or 20% (higher/additional rate taxpayers) for most disposals.
Special rates apply for capital gains arising from the sale of residential property (18% for basic rate taxpayers and 24% for higher rate taxpayers) and Carried Interest made by individuals carrying out investment management services (18% for basic rate taxpayers and 28% higher rate taxpayers).
Why is it predicted to increase?
There are two main reasons the rates of CGT are predicted to increase. Firstly, because both the Labour and the Conservative party have not explicitly ruled out an increase (as they have for Income Tax, National Insurance and VAT).
Secondly, because the difference between the current rate of CGT and income tax is quite stark. Income is taxed at rates of 20% (basic rate), 40% (higher rate) and 45% (additional rate). As noted above, the maximum rate of CGT applying on a sale of most assets is 20%; a difference of up to 25% when compared to the rates of income tax.
It is due to this difference that the rates of CGT have come under greater scrutiny, including from the Office of Tax Simplification before it was dissolved.
Will there be a Budget straight away?
As election day draws closer and the polls repeatedly suggest a change of Government, it is important that you start considering how this may impact you.
The Labour party have ruled out having an ‘emergency Budget’ if they win the election. Instead, they have indicated they will wait until they have forecasts from the Office of Budget Responsibility. This is likely to take around 10 weeks, which suggests any Budget would be in the early Autumn.
If this timescale is correct, this may allow some time to carefully consider taking action ahead of the new Chancellor of the Exchequer’s Budget. Historically, changes to tax rates are not “backdated” and will normally be set from the start of the next tax year or very occasionally from Budget Day.
What should you do?
Where there are changes it is always a good time to reconsider your position and your aims.
We will be happy to help you understand your position and discuss how it could be improved from a UK tax perspective. For example, if you are thinking about selling an asset or making a gift, it may be to your advantage to bring this forward to ‘lock in’ the current rate of CGT. This should take into account your Inheritance Tax (IHT) position and if any IHT reliefs apply (our article on ‘IHT and the General Election’ can be found on our website).
Any action will depend on your overall aims, the assets that you have and any financial or investment considerations, as tax should never be the only driver of any decision. We are happy to work with your investment adviser or solicitor to ensure you receive full, clear and robust advice that fits with your overall aims.
If you would like to discuss any concerns that you may have, please contact PEM.
This article was correct at time of publication.
