NEWS & VIEWS
During the run up to the 2024 General Election, Rachel Reeves said Labour had “no plans” to raise capital gains tax (CGT). However, the now chancellor has said that the government will “have to increase taxes” in the upcoming Autumn Budget due to a £22 billion “black hole” in the country’s finances. With Labour having promised in their 2024 manifesto that they would not increase income tax, National Insurance or VAT, the party is under pressure to find alternative ways to raise tax revenue.
Labour has already outlined its plans to raise around £7 billion from reforming the taxation of non-domiciled (non-dom) individuals, cracking down on tax dodgers, and ending the VAT exemption for private schools. But Labour will need to need to do more if it wants to plug this fiscal hole.
In a recent interview with Sky News, Reeves refused to rule out raising CGT in the upcoming Autumn Budget, saying she would not “write a budget two months ahead of delivering it”. Her evasion helped fuel press speculation that Labour may have the tax in its sights on October 30.
Below we explore some of the most talked about ways Labour could change the tax:
Aligning CGT with income tax
Currently, if you pay the higher or additional rate of income tax, you’ll pay 24% on your gains from residential property, 28% on your gains from carried interest, and 20% on your gains from other chargeable assets. If you’re a basic rate taxpayer, you pay 18% on your gains from residential property or carried interest and 10% on your gains from other chargeable assets.
In contrast, the highest rate of income tax is 45%.
44% of gains for CGT-liable individuals came from individuals with taxable incomes above £150,000 – the additional rate threshold for income tax – in the 2022/23 tax year. So, it is likely that if the two rates were aligned, this would translate to a significant jump for a large proportion of CGT payers.
The chancellor has previously expressed support for aligning the two rates. In her 2018 pamphlet, titled ‘The Everyday Economy’, Reeves argued that CGT should be reformed and paid at income tax rates. She did warn, however, that any reform would need to be aware of the risk of the “inefficient distribution of capital which gets locked into old investments out of investors’ fears of paying high capital gains tax.”
Researchers at the University of Warwick have estimated that equalizing CGT and income tax rates could raise as much as £16.7 billion a year. However, others suggest that this would actually reduce the tax take. Dan Neidle, tax lawyer and founder of Tax Policy Associates, suggested that the policy would cost around £3 billion in lost tax when the Liberal Democrats proposed equalising the two rates during their 2024 General Election election campaign.
Higher headline rates
Given criticism that equalising the CGT and income tax rates may led to entrepreneurs and top earners leaving the UK, the chancellor may instead be tempted to opt for a smaller increase to CGT rates.
According to HMRC’s own projections, increasing both the higher and lower CGT rates by just one percentage point could bring in an extra £185 million in 2026-27 and £125 million in 2027-28. However, the same projects suggest that pushing rates higher still would not necessarily lead to more money for the government.
“The government’s own figures show that a big increase in CGT rates could backfire and actually lead to lost revenue for the government,” Laura Suter, personal finance director at AJ Bell, explained, “for example, raising both the lower and higher CGT rates by 10 percentage points, to 20% and 30% for non-property gains, would result in a total loss of £2.05 billion for the Exchequer by 2027/28. That’s because while the rates are higher, investors would be expected to change their behaviour to mitigate paying the tax.”
In 2022/23, 369,000 people paid £14.4 billion in CGT. This represented a 15% decrease in the total liability against the previous tax year. The Office for Budget Responsibility currently estimate that CGT receipts could increase to £15.2 billion in 2024/25 and to £16.2 billion in 2025/26, should the tax remain unchanged.
Changing reliefs
According to HMRC’s projections, the biggest boost to tax revenue would come via an increase to the business asset disposal relief rate (BADR). BADR reduces the rate of CGT to 10% on the disposal of qualifying business assets. It was known as ‘Entrepreneurs’ Relief’ until 2020.
HMRC estimate that by hiking the relief by 10 percentage points it could bring in an extra £1.56 billion over the next three years. However, the move would be likely be unpopular with business owners. Tony Wickenden, joint managing director of Technical Connections (a St James’s Place Wealth Management group company), also warned the wouldn’t align well with the government’s hope to encourage business and economic growth.
An alternative route for the government would be to change the so-called “uplift on death”. According to the Institute for Fiscal Studies (IFS), scrapping relief that wipes out CGT charges on death would raise £2 billion a year for the Treasury.
At the moment, if a person does not sell during their lifetime and instead holds the asset until they die, they can avoid paying CGT altogether because of a relief known as “uplift on death”. This is because no CGT is charged on their period of ownership – though some assets will still be liable for inheritance tax. The person who inherits the asset does so at its current market value. This means that when they sell, they will only pay CGT on the increase in value since they took ownership.
An overhaul could trigger accusations that the chancellor is double taxing inheritance, however.
Potential CGT changes & CGiX
With only a few weeks to go until the Autumn Budget, we’d like to take the opportunity to reassure our clients that CGiX’s extensive history of capital gains tax legislation and indexation capabilities puts us in a strong position to quickly support your tax reporting needs, if any dramatic changes are announced. Whether changes are retrospective, mid-year or immediate, CGiX will be ready to support you.
If you’d like to discuss the potential incoming tax changes or learn more about how CGiX can assist you, get in touch.