Capital gains tax and autumn 24 budget

Introduction

With the Labor government pledging not to increase income tax, national insurance or VAT rates in its election manifesto, speculation is growing over whether further Taxes (such as capital gains tax) could be subject to adjustments in the coming months. Fall budget on October 30.

Possible tax increases!

Chancellor Rachel Reeves has highlighted the urgent need to close a £22 billion gap or “black hole” in the public finances, sparking widespread speculation over possible tax rises.

Capital Gains Tax – In the Spotlight

One tax coming under scrutiny is capital gains tax (CGT), which is imposed on profits made from the sale of fixed assets such as shares, property, antiques, etc.

In the 2022/23 tax year, CGT generated £14.4 billion in revenue, with just 369,000 individuals paying the tax.

Although a relatively small proportion of the population, the number of people paying CGT contributions has doubled over the last decade, making it an attractive option for generating income.

How capital gains tax works

Capital gains tax is levied on the profit (or “gain”) from the sale of certain assets, rather than the sale price itself. These taxable assets include shares or investments (not held in ISAs or pensions), personal property worth more than £6,000 (excluding cars) and land and properties which are not residence principal of the taxpayer.

It is important to note that CGT is calculated based on the difference between the original purchase price and the market value at the time of sale. Even if a good is given as a gift, it may still be subject to CGT, unless there are specific exemptions.

Not all assets are subject to CGT. Cars and primary residences, for example, are generally exempt. Additionally, transfers between married couples or civil partners, as well as assets passed after death, are exempt from the CGT obligation, although they may be subject to inheritance tax.

Current CGT thresholds and rates

Everyone gets an annual CGT allowance (called an annual exemption) which is currently £3,000. This threshold has been reduced significantly in recent years, from £12,300 just two years ago. The tax is only levied on earnings exceeding this deduction.

Sell ​​shares

For sellers of shares, this reduction can help reduce the tax payable by spreading transfers over several years. However, individuals selling high-value assets such as second homes do not have the same flexibility and can quickly find themselves liable for CGT.

Once gains exceed the £3,000 threshold, the tax rate depends on both the taxpayer’s income bracket and the type of asset sold. Higher and additional rate taxpayers are charged 24% on residential property gains and 20% on other assets. Basic rate taxpayers benefit from lower rates: 18% on residential properties and 10% on other assets.

However, basic rate taxpayers will pay the higher CGT rates if their total earnings plus income exceed the basic rate threshold which is currently £50,270.

Potential CGT changes in the autumn budget

Given the complexity of CGT, there have been calls for simplification, which could either reduce or increase the tax burden. Many analysts believe the new chancellor will opt for changes that will increase revenue, especially as the government faces pressure to close the large deficit.

One option being considered is a unified rate of CGT, which could simplify the tax but also increase the overall amount of tax, especially if set at current rates for higher taxpayers or on property sales.

The government could also consider removing some existing CGT exemptions. For example, restricting or removing the exemption for transfers between spouses and civil partners could generate substantial income, as it is a common tax planning strategy for families.

Another possibility would be to further reduce, or even completely eliminate, the CGT allowance, which has already seen significant reductions. This change would be relatively simple and could provide the government with additional revenue without requiring substantial overhauls of the existing tax framework.

Political implications

By targeting the CGT, the Labor government could raise additional funds without breaking its manifesto promise not to increase key tax rates. Reducing allowances or widening the scope of CGT would allow the government to increase tax revenue while maintaining the same overall tax rates.

As political commentators speculate about these potential changes, all eyes will be on Chancellor Rachel Reeves as she presents the autumn budget and reveals her plans for CGT and other tax reforms.

Next steps

The ETC Tax team have extensive experience in dealing with all UK taxes, including VAT. If the autumn budget leaves you wondering about your taxation, including CGT, do not hesitate to contact us.