As the general election approaches, there is growing speculation about potential changes to the capital gains tax (CGT) regime.

Currently, CGT is levied on individuals when they sell an asset for more than its base cost, typically the price paid for the asset. For example, if a rental property purchased for £300,000 is sold for £500,000, the capital gain is £200,000, and CGT is payable on this amount.

Current Capital Gains Tax rates and rules

The current CGT rates are as follows:

  • Gains on residential property are taxed at 24% (18% if the individual is a basic rate taxpayer).
  • Gains on most other assets sit are taxed at 20% (10% if the individual is a basic rate taxpayer).
  • The first £1 million of gains relating to qualifying business assets may be taxed at 10% with the balance taxed at 20%, under Business Asset Disposal Relief (BADR).

Compared to income tax rates, which can reach up to 45%, these CGT rates are relatively low. This discrepancy has led to speculation that CGT rates might increase post-election, potentially aligning with income tax rates or through the introduction of other significant changes.

Potential changes 

There are several potential changes to CGT that could be considered by a new government including:

  • Increase in headline CGT rates;
  • Alignment of CGT rates with income tax rates;
  • Abolition of BADR;
  • Changes to gift deferrals (currently, if an asset is gifted, the donor is deemed to sell the asset at its market value, with potential tax deferrals allowing the donee to carry forward the original base cost);
  • Abolition of the 0% rate for business sales to employees;
  • Redefining certain capital gains as profits taxable under income tax;
  • Changes to the ‘death uplift’ (currently, beneficiaries receive assets at their market value at the date of death without a CGT charge).

Tax planning ahead of a post-election Budget

With the potential changes on the horizon, both individuals and businesses should consider being proactive with their tax planning:

Accelerating sales of investment assets

If you are in the process of selling an investment asset or considering a sale in the short to medium term, it may be wise to push the transaction to completion. For example, a £200,000 gain on a residential property currently incurs approximately £48,000 in CGT, which could rise to £90,000 if CGT rates align with the 45% income tax rate.

Business sales 

The potential abolition of BADR or changes to the rates and reliefs available could significantly impact the tax efficiency of selling a business. Business owners must review their plans and consider acting before any changes are implemented. Learn more about our corporate tax services >

Alternative solutions

For anyone unable to complete a sale at present, there are other ways to secure the current tax regime even if the sale itself is delayed.

Gifting assets

Similarly, if you are considering making gifts, now might be the time to act. We cannot rule out the possibility of some reforms to the inheritance tax regime. One change could be that a new government introduces a “gift tax,” charging an immediate levy based on the value of the gift. Many jurisdictions already have such a tax in place, and its introduction could add another layer of complexity and cost to asset transfers.

Further, if an individual gifts an asset rather than cash e.g. a property, there could be a CGT liability on the gift. This is because the donor is deemed to have sold the asset for its market value for CGT purposes. With potential CGT changes afoot, this would be another reason to consider making gifts sooner rather than later.

While we cannot say with certainty what changes a new government may introduce, it is crucial to be prepared. Proactive tax planning can mitigate potential increases in CGT and other taxes to ensure you are not caught off guard by post-election reforms. We advise you to consult with your tax adviser to understand how potential changes could impact your situation.

We will continue to monitor and update as the general election draws nearer.

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Julia is a chartered tax adviser, solicitor and trust & estate practitioner. She has a wide range of experience, advising clients from both a personal and corporate tax perspective.

Julia provides bespoke tax advice to a wide range of clients, including businesses and their stakeholders, real estate owners, trustees in both the UK and offshore, and high net worth individuals. She advises clients that are both UK and internationally based and has extensive cross-border tax experience. Having worked across the accountancy and legal sectors, Julia brings a distinctive insight to tax advice and planning, and approaches matters in a pragmatic and commercial manner. Julia has been named as “top recommended” in the Spear’s ranking of the best accountants and tax advisers.

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Published: 11th June 2024
Area: Tax

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