As we anticipate the upcoming autumn budget and the possibility of tax hikes, we examine Capital Gains Tax and the chances of this levy being increased.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax levied on the profit made from the sale or disposal of certain assets, such as property, stocks, or shares, that have increased in value since their acquisition. It's important to note that the tax is only applied to the gain itself—the difference between the original purchase price and the selling price—not the entire sale amount.
The rate at which CGT is charged can vary depending on the asset type and the taxpayer's income bracket, with higher earners typically paying a higher percentage. Exemptions and reliefs may apply, such as the annual tax-free allowance or specific reliefs for business assets, but any gains above these thresholds are subject to taxation.
How Much Does CGT Generate?
Capital Gains Tax generated around £15 billion last year. While this may seem like a substantial sum, it only accounted for about 1.7% of the total tax revenue. To put this into perspective, the revenue from CGT covers roughly three-quarters of the so-called fiscal gap.
Given this relatively small contribution to the overall tax take, any adjustments to CGT would need to be significant to make a meaningful impact. However, it's unclear if this alone would be enough to address broader fiscal challenges.
During the tenure of the Conservative government, there were indeed some changes to CGT, but the core flat-rate structure we see today traces its roots back to Alistair Darling. When Gordon Brown transitioned from 11 to 10 Downing Street in 2007, Darling introduced the idea of a flat-rate CGT, marking a notable shift in the taxation landscape.
Thus, any substantial changes now would essentially represent a reversal of the Labour policies of that era—though comparing the current government’s strategy with that of the last Labour administration is not straightforward.
Recent Adjustments to CGT
One of the most recent adjustments to CGT occurred in the Spring when former Chancellor Jeremy Hunt announced a reduction in the CGT rate on property from 28% to 24% for higher-rate taxpayers. One possible approach for Chancellor Reeves could be to simply reverse this reduction.
Alternatively, she might opt to eliminate the rate differential for basic and higher-rate taxpayers, reintroducing a single flat rate for all, potentially at 24%, echoing Darling’s original vision of an 18% flat rate. Another possibility could be to transform CGT back into a standalone tax, rather than having it combined with income and taxed at marginal rates.
Reduction in CGT Annual Exemption
The CGT Annual Exemption has also been steadily reduced over recent years. Once set at £12,300, it has now been slashed to just £3,000 after two successive reductions. The Chancellor could consider abolishing the Annual Exemption altogether, though this move would likely pull hundreds of thousands of additional taxpayers into the Self-Assessment system for relatively modest gains.
Removal of Specific Reliefs
Another area of potential reform is the removal of specific reliefs, such as Business Asset Relief, previously known as Entrepreneur’s Relief. This relief currently allows for a 10% CGT rate on the first £1 million of gains in a taxpayer's lifetime. Eliminating or modifying this relief would, again, represent a significant shift from the policies implemented in the 2007 legislation, which was originally designed to provide additional support for business owners.
Given the nature of these potential changes, particularly the possibility of abolishing the Annual Exemption or adjusting reliefs, it is likely that any new measures would need to be implemented swiftly. This would prevent a rush to sell assets, which could destabilise markets such as the buy-to-let sector. Rapid implementation would also help the government capture the additional revenue sooner, providing an immediate boost to public finances.
To discuss any tax questions you may have, and how potential increases might affect you, please get in touch.