What to expect?
The Government may turn towards increasing tax on what might loosely be termed wealth and in particular capital gains tax (CGT).
Fact!
Currently CGT raises less than 2% of the total tax take – it raised £14.5 billion in 2022/23, and this is £2.5bn down from the previous tax year.
Potential Reforms?
To improve that tax take, the Chancellor could potentially consider a number of reforms to the CGT regime on 30 October:
- Increase the rate of CGT to perhaps 25% or 30% and apply a lower rate, of say 20%, for sales of business assets to support entrepreneurial growth. The optimum rate is thought to be around 18% so raising the rate of tax may actually lead to few transactions and therefore lower tax revenue’s;
- Abolish or trim the £1m business asset disposal relief limit;
- Tax lottery and gambling wins (but HMRC would then need to give relief for losses);
- Remove the CGT exemption for ‘wasting assets’ such as wine and classic cars;
- Remove or further reduce the already much hammered £3,000 capital gains annual exemption;
- Place a threshold on the amount of principal private residence relief someone can claim in their lifetime or restrict the relief to lifetime so that death triggers a capital gain for the estate (although Kier Starmer said during General Election campaigning that principal private residence would be left alone); and
- Remove the capital gains base cost uplift on death (though this would have to come as part of wider reforms to Inheritance Tax).
We will have to wait and see exactly what the Prime Minister and new Chancellor decide to do … until 30 October it is all speculation, of course. However, given recent pronouncements and the fast pace of other changes, such as VAT on private school fees, it seems inevitable now that the tax cost for many investors and entrepreneurs is only going to go up.
Action?
Any pessimists wishing to take pre-emptive action in the next couple of months should bear in mind a couple of points.
Various options to crystallise a capital gain under the current rate would essentially mean committing to paying the associated tax by 31 January 2026 (assuming action in the current 2024/25 tax year) and relying on any transaction completing and receiving the proceeds by then to pay the tax bill.
Those selling listed shares standing at a capital gain will need to watch out for the CGT 30-day rule if they decide to act now – this means that investors must wait 30 days before acquiring the exact same share or same class of a specific fund. HMRC implemented this measure to stop investors who intend to maintain ownership of specific securities from maximising their CGT savings, under the so-called ‘bed and breakfasting’ strategy.
Stephen Parnham
September 2024
