What’s the future for capital gain tax?
18 April 2023
In March 2023, Labour shadow chancellor Rachel Reeves said that Labour has “no plans” to increase the rate of capital gains tax (CGT) if it wins the next general election. However, in a recent interview with the BBC’s Today programme, Labour’s deputy leader Angela Rayner reopened the debate by suggesting that a commitment to increase CGT rates could be included in Labour’s election manifesto.
The Office for Budget Responsibility (OBR) estimates that CGT raised approximately £15.9bn in 2022/23. That only represents 1.7% of total tax receipts for the year but a new government looking to raise funds might be tempted to look at CGT, which is currently charged at a maximum 20% for most assets excluding residential property, compared to maximum income tax rates of 45%.
However, increasing CGT rates would not automatically increase tax yields. Unlike income, which can be hard to stop and start, capital gains are only made when an individual chooses to dispose of an asset. If CGT rates go up, owners may simply hold on to assets for longer, and doubling CGT rates is unlikely to come anywhere near doubling tax receipts.
There may be good reasons why CGT rates are currently lower than income tax. Privileging capital growth may encourage investment, providing support for the economy. However, there are different ways to achieve this. In the past CGT rates have been structured to provide targeted incentives to invest in UK business assets, with the rate of tax charged reducing over time to encourage long-term ownership. Even if CGT and income tax rates are not equalised, CGT could be revamped after the election, so now may be the time to think about protecting against possible future changes.
From 6 April 2023, the annual CGT exemption has gone down to £6,000 per person. It will fall to £3,000 from 6 April 2024. As a result, the opportunity to reduce future tax bills by realising gains to use the exemption is now limited. However, it is still possible for spouses and civil partners to transfer assets between themselves free from CGT, and this can be useful if one person is only taxable at the basic rate where CGT is payable at half the ‘full’ rate.
In some cases, such as when claiming enterprise investment scheme (EIS) relief, CGT on a sale can be deferred by ‘holding over’ the gain against the new investment. Although, this can create more problems than it solves. If tax rates go up, the gain will suffer tax at a much higher rate when the new asset is sold than if the tax was paid on the first sale today. Whereas in the past, it has generally been sensible to delay paying tax, if you think that rates might rise then the certainty of paying a known amount of tax now can be preferable.
The same logic applies to any assets that have increased in value, but with a big warning, as Rachel Reeves’ comments emphasise, there is no guarantee that CGT rates will change at all in the foreseeable future. If you own assets that you are happy to sell and make a gain, 2023/24 may be a good time to do it to lock in low CGT rates. For anything else, you need to ask yourself how you would feel when that tax bill comes in on 31 January 2025 if rates don’t change – certainty in tax comes at a cost.
The Office for Budget Responsibility (OBR) estimates that CGT raised approximately £15.9bn in 2022/23. That only represents 1.7% of total tax receipts for the year but a new government looking to raise funds might be tempted to look at CGT, which is currently charged at a maximum 20% for most assets excluding residential property, compared to maximum income tax rates of 45%.
However, increasing CGT rates would not automatically increase tax yields. Unlike income, which can be hard to stop and start, capital gains are only made when an individual chooses to dispose of an asset. If CGT rates go up, owners may simply hold on to assets for longer, and doubling CGT rates is unlikely to come anywhere near doubling tax receipts.
There may be good reasons why CGT rates are currently lower than income tax. Privileging capital growth may encourage investment, providing support for the economy. However, there are different ways to achieve this. In the past CGT rates have been structured to provide targeted incentives to invest in UK business assets, with the rate of tax charged reducing over time to encourage long-term ownership. Even if CGT and income tax rates are not equalised, CGT could be revamped after the election, so now may be the time to think about protecting against possible future changes.
From 6 April 2023, the annual CGT exemption has gone down to £6,000 per person. It will fall to £3,000 from 6 April 2024. As a result, the opportunity to reduce future tax bills by realising gains to use the exemption is now limited. However, it is still possible for spouses and civil partners to transfer assets between themselves free from CGT, and this can be useful if one person is only taxable at the basic rate where CGT is payable at half the ‘full’ rate.
In some cases, such as when claiming enterprise investment scheme (EIS) relief, CGT on a sale can be deferred by ‘holding over’ the gain against the new investment. Although, this can create more problems than it solves. If tax rates go up, the gain will suffer tax at a much higher rate when the new asset is sold than if the tax was paid on the first sale today. Whereas in the past, it has generally been sensible to delay paying tax, if you think that rates might rise then the certainty of paying a known amount of tax now can be preferable.
The same logic applies to any assets that have increased in value, but with a big warning, as Rachel Reeves’ comments emphasise, there is no guarantee that CGT rates will change at all in the foreseeable future. If you own assets that you are happy to sell and make a gain, 2023/24 may be a good time to do it to lock in low CGT rates. For anything else, you need to ask yourself how you would feel when that tax bill comes in on 31 January 2025 if rates don’t change – certainty in tax comes at a cost.
