The UK government has paved the way for tax increases at the upcoming Autumn Budget, scheduled for 30 October, and speculation is mounting that capital gains tax (CGT) could be one area targeted to close a claimed £22bn fiscal hole. Sir Keir Starmer recently said that he “did not want to raise taxes on ordinary working people” and that “those with the broadest shoulders should bear the heaviest burden” in a speech that many observers believe strongly hinted at an imminent CGT increase.
What is CGT?
CGT is a relatively new tax, created in the mid-1960s, and a levy on the profit when you sell (or ‘dispose of’) an asset that has increased in value. It only applies to gains, not the amount of money you receive and is levied on various assets, including, shares, property (not your main home) and business assets. It does not apply to capital growth of UK government bonds, qualifying corporate bonds or any holdings in tax efficient products, such as ISAs. The rates of CGT can vary depending on your total taxable income and the type of asset sold but crucially the highest rates are currently 20% on conventional investments like shares and mutual funds, 24% on rental properties and 28% for carried interest —well below the 45% top rate of income tax.
Why target CGT?
Around the time of the previous budget this spring, the Office for Budget Responsibility — the UK’s fiscal watchdog — projected an £87bn (3.1% of national income) deficit for the 2024/25 fiscal year. Deficits are not uncommon in the UK and you have to go back over 20 years to find a year where a surplus was recorded. Labour was aware of this forecast before taking office, but it has since claimed public finances are in an even worse position with a further £22bn unaccounted for.
While this figure has been fiercely disputed, with opponents pointing to above inflation public sector pay rises among other things, the government has stated that it will reduce spending in some areas (such as cutting the winter fuel allowance for pensioners) and also seek to raise taxes. To put the figures in some perspective, the deficit of over £100bn is equivalent to roughly £4,000 per household. The Chancellor has announced public spending cuts of approximately £8bn, leaving somewhere in the region of £14bn to be raised.
Whilst electioneering, Sir Keir Starmer promised not to hike income tax, national insurance, VAT or corporation tax – revenues that account for almost 80% of taxes in the UK. These taxes raised a combined £580bn in 2022-23, dwarfing the £16.9bn raised from CGT. A significant reason for this disparity is the number of people impacted, as around 34m paid income tax, whereas fewer than 400,000 paid CGT. Economists, including the Institute for Fiscal Studies, estimate that aligning CGT rates with those of income tax could increases revenue by high single-digit billions of pounds per year.
Should we expect a major hike?
Substantially raising the CGT rate may seem the obvious solution to increasing revenue from this tax but there is evidence that higher rates do not automatically mean a commensurate increase in the tax take. This is because people behave differently under different circumstances, for instance those sitting on sizable gains may be less inclined to sell an asset if the rate has just been substantially raised. There is a theoretical optimal point for raising the highest amount of revenue from a given tax, and increases beyond this point are detrimental. This concept, known as the Laffer curve, may weigh on decision making and encourage Labour to stop short of aligning CGT with the top rate of income tax.
There are two other options available to the government: removing or adjusting existing reliefs to make them less generous or overhauling of the entire system. CGT was targeted by the previous Chancellor, Jeremy Hunt, through a reduction in the annual exempt amount (AEA). The £12,300 AEA for 2022/23 was reduced to £6,000 for 2023/24 and is at £3,000 from 2024/25 going onwards.
A complete overhaul of the system appears the least likely option given the time and preparation that it would require. We believe the most likely option is an increase in the CGT rate and some further reductions to existing reliefs. The worst-case scenario for those impacted would be an equalising of the CGT rate with income tax (top rate 45%), but we believe the government may refrain from going this far given the potential adverse effect it would have on revenues.
When should we expect changes?
Should CGT changes be announced in the Autumn Budget, when will they come into effect? There are two options:
1. Straight away
If they are announced as anti-forestalling, that means they will either come in with immediate effect or from midnight on the day of the announcement.
2. Next tax year
Most tax changes after an announcement are often scheduled to take effect from the start of the next tax year, or 6 April 2025.
While the last significant change to the CGT rate (George Osborne’s 2010 increase) came in immediately we believe the government is more likely to be swayed by the prospect of a near term boost to revenue that could come with opting for a 6 April 2025 implementation date. Giving people time to dispose of assets at the current rate is a strong incentive for them to sell, thereby boosting revenues, whereas raising CGT immediately would in fact disincentivise selling.
Navigating potential changes to CGT
The most important thing to remember is that it is better to sell an asset that does not fit into your optimal portfolio, than hold on to it to avoid tax implications. Do not let the tax tail wag the investment dog. Ultimately everyone’s financial position is unique, so it is always worth seeking advice before making decisions.
Here are some ideas you can consider to combat potential CGT changes:
Tax deferral strategies
Tax deferral options can help shield from potential higher CGT rates, assuming rates eventually go down or are washed out. Here are some examples:
- Investment bonds (onshore and offshore): defer paying personal tax on the investment growth until there is a chargeable event. This can be particularly useful for additional and higher rate taxpayers and if you expect to be in a lower tax bracket in the future.
- Trusts: transfer assets into relevant property trusts, delaying the point at which CGT is payable. Depending on individual circumstances there may be a benefit of assigning assets to a lower taxpayer who you would want to benefit.
- Holdover Relief: defer CGT when gifting business assets or shares until the recipient disposes of the asset.
- Roll-Over Relief: defer CGT if you sell a business asset and reinvest the proceeds in another qualifying business asset.
Utilise allowances
Make sure to take advantage of any available allowances and reliefs, such as the annual CGT allowance, to reduce your taxable gains, and ensure that any losses are recorded, so they can be carried forward.
Register to a Quilter Cheviot exclusive event
Taking Stock after The Bell: Live webinar budget update with Adam Smith.
When: Thursday 31 October | 2pm
Join us for a live webinar where Quilter Cheviot investment experts Jonathan Raymond and James Hughes will be joined by former Chief of Staff to the Chancellor of the Exchequer, Adam Smith. Adam will share some words of wisdom from his time in Whitehall, while breaking down the Autumn Budget and discussing what it really means for your money.
Seek professional advice
The UK tax code is one of the longest in the world and can prove confusing – particularly as we sit in the unknown. That is why seeking professional advice can make all the difference when making major financial decisions.
At Quilter Cheviot Financial Planning, our planners work alongside clients like you to navigate tax implications and deliver the best possible outcome. To find out more about our services or to book a no-obligation complimentary initial consultation with a financial planning specialist email enquires@quiltercheviot.com.
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