What might the UK government change about capital gains tax in the next budget?
What if the next time you sold your home, business, or shares, you lost 40% or more of your profits to tax? That might sound extreme, but it’s exactly the kind of change being discussed in the UK right now.
As the next UK Budget approaches, there’s growing anticipation about possible changes to Capital Gains Tax (CGT). With the government looking to boost tax revenues, CGT is one area many believe could face significant adjustments. For some, this might mean paying double what they do now when selling assets like property or shares. But why does this matter? It’s not just investors or business owners who will be impacted – it’s almost everyone who’s ever sold something for a profit.
Changes to CGT could affect how you plan your financial future, where you invest your money, and even when you retire. Now is the time to understand what could be coming and how to protect your future.
What is capital gains tax?
Capital Gains Tax (CGT) is a tax on the profit made when selling (or ‘disposing of’) an asset that has increased in value. The tax only applies to the gain—the difference between the asset’s purchase price and its selling price—not the entire sale amount. Assets subject to CGT may include shares, investment portfolios, property (other than a primary residence), and personal items like artwork or jewellery.
For the 2023/24 tax year, the annual CGT allowance was reduced from £12,300 to £6,000, meaning that gains up to £6,000 were tax-free. However, from April 2024, this annual tax-free allowance has been further reduced to £3,000 – Capital Gains Tax – GOV.UK (www.gov.uk). Any capital gains over this threshold may be subject to tax, with rates varying based on the type of asset and the individual’s income tax bracket.
Is capital gains tax about to double?
One of the key proposals under consideration is to bring CGT rates in line with income tax rates. This means high earners could face a CGT rate of 40% or more instead of the current 20%. In real terms, a person selling a £500,000 investment property with a £200,000 gain might pay £48,000 in CGT. Under the proposed changes, this could increase to £90,000 or more.
This isn’t just a concern for the wealthy. Middle-class families who have invested in property or shares for years could see their gains sharply reduced when they sell.
Proponents of this change argue that it would make the tax system fairer, as many wage earners pay a higher effective tax rate than those benefiting from capital gains. However, critics warn it could stifle investment and discourage entrepreneurship.
What else could change in the upcoming budget regarding CGT?
Several potential changes to CGT have been speculated as part of the government’s strategy to boost revenue. Here are some of the most likely possibilities:
The CGT allowance has already been reduced to £3,000 from April 2024, but there is concern that the government could cut this even further—or abolish it altogether. This would mean more people become liable for CGT on smaller gains, especially those selling assets like shares or second homes. This would broaden the tax’s reach, affecting more taxpayers across different income levels.
As mentioned, aligning CGT with income tax rates would raise rates to as high as 40% or 45% for higher-rate and additional rate taxpayers. This could significantly impact landlords, business owners, and investors, making large asset sales much less profitable.
Currently, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) offers a reduced CGT rate of 10% on qualifying gains up to a £1 million lifetime limit. This relief encourages entrepreneurship by offering tax breaks on business sales. However, there is speculation that the government might reduce this lifetime limit or tighten eligibility. This could discourage some from starting new ventures or investing in small businesses.
With property already subject to higher CGT rates, there’s talk that the government might increase these further. Aligning property gains with income tax rates or introducing higher bands for property could affect landlords and investors with multiple properties, likely reshaping the buy-to-let market.
Finally, there’s a possibility the government could simplify CGT rules. Currently, different rates apply to different asset types and income bands, making the system complex. A simplified system might involve a single rate for all taxpayers or standardised rates across assets. While this could reduce administrative burdens, it may also lead to higher taxes for certain groups, particularly those in higher tax brackets who benefit from lower CGT rates on non-property assets.
What would these changes mean for you?
If these changes are introduced, they will likely affect a broad range of people, from everyday investors to high-net-worth individuals. Here’s how:
- Impact on investment behaviour
Higher CGT rates or reduced allowances could discourage individuals from investing in assets like shares, properties, or businesses. People may hold onto assets longer to avoid paying tax, leading to reduced liquidity in markets. Alternatively, they may look for tax-efficient investments like ISAs or pensions to shelter from CGT, but these have limits to the amount that can be contributed and types of assets that can be held.
- Increased demand for tax planning
If CGT is aligned with income tax, more people will seek tax planning services to minimise liabilities. Strategies like gifting assets, transferring ownership to lower-rate taxpayers (e.g., a spouse), or using tax reliefs will become even more important.
- Effects on the property market
Increases in CGT on property sales could reduce the number of property transactions, particularly in the buy-to-let market. Landlords may be less willing to sell, reducing supply and potentially driving up house prices. On the other hand, we could see a short-term surge in sales before any changes take effect.
- Impact on businesses and entrepreneurship
Tightening Business Asset Disposal Relief could discourage investment in start-ups and small businesses, especially for individuals hoping to benefit from a lower CGT rate when they sell. This could dampen entrepreneurial activity in the UK, making it harder for smaller businesses to attract investors.
What’s your next move?
As the UK prepares for its next budget, the question isn’t just whether Capital Gains Tax will go up – it’s what you’ll do about it.
While Labour has previously said there are “no plans” to raise CGT, the possibility is still very real. If rates rise, it could reshape the way you manage your finances, sell your assets, and plan for the future. Whether it’s through higher taxes on business sales, property investments, or inheritance, these changes could have lasting impacts on your financial outlook.
So, what’s your next move? Do you act now, or do you wait and see? Now is the time to speak with your tax or financial adviser, review your assets, and prepare for whatever comes next.
The decisions made in the coming weeks could have long-lasting effects but how you respond to them is entirely up to you.
By Shaun Coleman, Chartered Financial Planner at Skills Edge Training.