With Labour pledging not to raise Income Tax, National Insurance, or VAT, speculation is rife about how Chancellor Rachel Reeves will address the £22bn shortfall in the Autumn Budget.
One likely target is Capital Gains Tax (CGT), which could see higher rates or rule changes to catch more taxpayers, particularly property owners and investors.
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How Capital Gains Tax Currently Works
Capital Gains Tax (CGT) is levied on profits made from the sale of assets like property, shares, or investment funds.
CGT is applied to the difference between the original purchase price and the sale price, meaning you pay tax on the profit, not the full sale value.
Key assets subject to CGT include:
- Shares and investment funds outside an ISA or pension.
- Personal possessions worth over £6,000 (except cars).
- Properties that are not your main residence.
Certain exemptions apply, such as your family home and transfers between spouses or civil partners.
The current CGT allowance is £3,000 per year (down from £12,300), meaning only gains over this threshold are taxed.
Higher-rate taxpayers face a 24% CGT rate on residential property and 20% on other assets, while basic-rate taxpayers are charged 18% and 10%, respectively.
However, large gains can push basic-rate taxpayers into a higher tax bracket, leading to higher CGT charges.
Potential CGT Reforms in the Budget
In the face of a £22bn budget deficit, Rachel Reeves is under pressure to generate additional revenue without increasing key taxes like Income Tax, National Insurance, or VAT.
One of the most discussed areas for reform is CGT, and there are several possible changes on the horizon.
One of the most significant potential changes is an increase in CGT rates, with rumours suggesting that Labour could raise the rate as high as 45%, which aligns with the top Income Tax rate.
This would particularly impact higher earners and those selling large assets, like second homes and investments.
Additionally, political commentators are speculating about the possible removal of certain CGT exemptions, such as the spousal transfer exemption.
Currently, married couples and civil partners can transfer assets between each other without triggering CGT.
Removing this exemption would increase the tax burden on families, particularly those engaging in tax planning strategies for property or large investment portfolios.
Another anticipated change could be further reductions to the CGT annual allowance, which has already been slashed to £3,000 from £12,300 in just two years.
Abolishing or reducing this allowance even further would increase the number of taxpayers caught by CGT, especially those with modest gains from the sale of shares or property.
This would broaden the CGT base, capturing more individuals and raising substantial additional revenue for the Treasury.
Reeves may also consider simplifying the CGT system, potentially aligning the rates for different asset classes.
For example, a single CGT rate could be introduced for all asset types, which would remove the current distinctions between residential property, other assets, and non-residential property.
However, this could disproportionately affect those selling residential property, which currently attracts a higher CGT rate.
These potential reforms suggest that Labour may look to increase the CGT take substantially while keeping their promise not to increase taxes like Income Tax or VAT.
Property owners and investors are likely to bear the brunt of these changes, especially if exemptions are removed and rates rise to match the highest tax bands.
Preparing for Potential CGT Changes
Though it’s difficult to predict the exact changes in the Autumn Budget, it’s wise to review your asset portfolio and understand your exposure to CGT, especially for property investments.
Taking advantage of tax-efficient wrappers like ISAs and pensions remains one of the best ways to shield investments from CGT.
For property owners, particularly those holding second homes or non-residential properties, now may be the time to consider whether selling before potential rate hikes would be beneficial.
Using the non-residential CGT regime may allow some investors to reduce the impact of tax changes by selling under more favourable terms.
Summary
With CGT firmly in the government’s crosshairs as a potential revenue source, property owners and investors should be prepared for possible increases in tax rates and reductions in allowances.
Non-residents holding non-residential property could leverage the CGT regime to avoid the full impact of any tax hikes, especially where gains made before 2019 are exempt from CGT.
At Tax Expert, we can help you understand potential changes in tax regulations and ensure that your assets are protected from the upcoming Autumn Budget.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel