With a manifesto pledge by the new Labour government not to raise income tax, national insurance or VAT, there is a likelihood of increases to capital gains tax rates.
In recent years there has always been speculation about potential increases to CGT rates prior to the annual budget but, with recent pronouncements of a larger than expected black hole in the finances, it no longer appears to be a question of if there will be an increase but what the increase will be.
Whilst aligning the higher rate of CGT with the higher rate of income tax at 40% does have some advocates, it would be a harder sell politically and a more modest increase in the CGT rates (from 20% to say 25%) could actually raise more revenue.
A higher rate of CGT has already applied to the disposal of residential properties since 2016. This higher rate (which does not apply to disposal of the main home which Labour have indicated will remain exempt) was recently reduced from 28% to 24% and a reversal, and perhaps even a further increase, in the rates of CGT on disposal of second homes is a distinct possibility.
Other areas that are likely to come under the microscope are various CGT reliefs, such as Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). The limit on this relief, which reduces the CGT rate from 20% to 10% on qualifying lifetime gains, has, over time, been reduced from £10 million to £1 million. However, this still represents a tax saving of up to £100,000 per person and a further reduction of the limit to, say, £500,000 would be an easy way to raise more taxes.
The other area that we believe may be reviewed is the current situation whereby, on death, certain business assets, such as shares in trading companies, qualify for relief from inheritance tax and are not subject to CGT either. In effect, there is a tax-free uplift for CGT purposes so that any historic gains in value of the shares are wiped out. We explore this in more detail in our article on Business Property Relief.
In terms of when any changes are likely to occur, although historically changes in tax rates announced in the budget come into effect from the following 6 April (start of the next tax year) with only anti-avoidance measures having immediate effect, there has been a trend in recent years of some tax changes coming into effect from the budget date and, as any announcement of a significant increase in CGT rates would be likely to trigger a rush of disposals, there is a real prospect of any increase of CGT rates taking effect from midnight on budget day.
In summary, if you are currently looking to dispose of a business, or are simply considering succession planning, now is an opportune time to do so, before the Autumn Budget.
For expert advice on capital gains tax, contact our tax solicitors.
