Capital Gains Tax (CGT) is paid on the profits of the sale of assets – outside of tax efficient vehicles such as ISAs and Pensions – and there is speculation it could be a target in the Budget on 30 October, says Rob Morgan, chief investment analyst at Charles Stanley.
CGT is not exactly a big revenue generator as things stand. The OBR estimates that CGT receipts will come to £15.2 billion in the current 2024/25 tax year, which represents just 1.3% of all tax receipts. However, combined with other measures Ms Reeves unveils, it might help to fill her claimed ‘black hole’ in the government’s finances.
One possibility is that Labour could look to increase rates of capital gains tax. Current rates of CGT are 10% and 20% for basic and higher rate respectively, with the higher rates for second properties 18% and 24% in the current tax year. These sit well below the corresponding income tax rates, and several Labour MPs have suggested CGT rates should be increased with some backing an equalisation with income tax.
However, that’s not necessarily a smart idea for raising revenue. Unlike most income, capital gains can be managed to limit the tax liability. Simply put, typically an individual doesn’t have to sell an asset if they don’t want to, so any increase in the tax may end up backfiring as more people decide to sit on their hands rather than sell.
Interestingly, HMRC modelling predicts that in many scenarios this is the case over the medium term. However, ironically, a signalled increase can boost revenue in the short term if people are motivated to bring forward disposals at current, lower rates before they expire.
How likely is a CGT increase?
One telling insight into the mind of the Chancellor on this issue came on BBC Radio 4’s Today programme last year. She stated that, “I don’t have any plans to increase capital gains tax. There are people who have built up their own businesses who maybe at retirement want to sell that business. They may not have had huge income through their life if they’ve reinvested in their business, but this is their retirement pot of money”.
This doesn’t rule out a change to the rules, but it does indicate sympathy towards those whose business also represent a large part of their retirement planning. However, business owners already have more generous CGT treatment, paying a rate of 10% up to the value of £1m on the sale of an eligible business by claiming Business Asset Disposal Relief. Meanwhile, Hold-over Relief, allows a business asset, and any CGT liability, to be passed onto a recipient. It’s possible the Chancellor may be scrutinising how these operate.
There could also be reform surrounding the ‘market uplift’ of capital gains on transfer of assets on death. Presently assets can be passed on CGT free, and the beneficiaries are deemed to acquire the asset at market value at the time of death. In effect, any capital gains or losses on assets held up to the date of death are wiped out – though there may be inheritance (IHT) to pay on the combined value of the estate. It would be possible to apply CGT on death or, more likely, rule that assets received by a beneficiary carry a base cost relating to the original purchase.
This would have a particularly punitive effect on estates falling outside of IHT nil-rate bands with significant non-exempt assets.
What can people do?
Those with assets standing at a profit outside of CGT exempt wrappers such as ISAs and pensions may be considering what action, if any, to take. This is a difficult dilemma as there will not necessarily be any changes in the coming Budget, and if any are announced they would not ordinarily come in right away. Budget tax announcements typically take effect from the next tax year, although it is worth noting a precedent has been set with George Osborne announcing an immediate increase in CGT in June 2010.
As such it may be worth considering the following, and seeking professional tax advice if unsure:
• Making any planned disposals ahead of the Budget to have greater certainty over the tax liability
• Harvesting gains and/or executing a Bed & ISA for any shares with profits if you have not already used up the ISA allowance
• If you are married or in a civil partnership, it may be worthwhile transferring certain assets to or from your partner. You usually don’t pay capital gains tax on an asset you give or sell to your husband, wife or civil partner. They may have to pay tax on any gain if they later dispose of it, but they may pay a lower rate and/or be able to use their CGT allowance.
• Understanding the impact any change to a CGT relief you are particularly reliant upon for your planning.
• The consideration of more sophisticated products such as offshore bonds for tax planning
