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 £500,000 is sold for £1,000,000, the capital gain is £500,000, 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 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 has led to speculation that CGT rates might increase, potentially aligning with income tax rates or through the introduction of other significant changes.
Potential changes to CGT
There are several potential changes to CGT that could be considered by Rachel Reeves, the new Chancellor of the Exchequer including:
- Increase in CGT rates;
- Alignment of CGT rates with income tax rates;
- Abolition of BADR;
- Changes to gift reliefs (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);
- Recategorizing certain capital gains as profits taxable under income tax;
- Changes to the ‘CGT uplift on death’ (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 potential changes imminent, both individuals and businesses should consider proactive 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 £500,000 gain on a residential property currently incurs approximately £120,000 in CGT, which could rise to £225,000 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, which may still be possible in the relatively short time period available.
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
If you are considering making gifts, then it may be worth making these before the budget as there may be both capital gains and inheritance tax changes to the treatment of gifts.
While we cannot be certain what changes the new government will introduce, it is sensible to be prepared. Tax planning can mitigate potential increases in CGT and other taxes to ensure you are not caught off guard by budget changes . If you think that you are likely to be affected please contact us and we can arrange a consultation.
Other areas of tax where changes are expected include
- VAT on independent school fees
- Rules for Non-Doms
- IHT – changes to agricultural and business property relief
If you want to know more about how any of these prospective changes will affect you or your business please contact us below.