Here’s why CGT is currently at the centre of attention and the implications of potential changes.
Economic growth at risk?
The National Institute of Economic and Social Research (NIESR) has voiced strong concerns about the potential impact of increasing CGT. The think tank argues that raising CGT would deter private investment, which is crucial for driving economic growth.
According to NIESR, the UK is already facing sluggish economic growth, with GDP expected to rise by just 1.3% annually in the coming years. This is far below the government’s target of 2.5%, and any measures that further inhibit investment could exacerbate the situation.
Impact on the property market
One of the most contentious aspects of the CGT debate is its potential impact on the property market.
Currently, landlords and second homeowners benefit from lower CGT rates on property sales. However, if Labour align CGT with income tax, investors would instead pay either 20%, 40% or 45%, meaning the average landlord would be £11,000 worse off.
This potential tax increase could trigger a rush of property sales, as investors seek to offload their assets before the new rates take effect. While this might temporarily boost housing market activity, it could also lead to longer-term instability. Many landlords might reconsider their property portfolios, potentially shifting their investments to other assets with more favourable tax treatments. This exodus of landlords could reduce the availability of rental properties, pushing up rents and exacerbating the housing crisis.
Impact on business exits
There has been a recent uplift in business owners considering disposing of their businesses, perhaps bringing forwards retirement plans or restructuring groups.
One driver behind this is to take advantage of the current, attractive CGT relief available on company disposals (10% CGT for disposals eligible for Business Asset Disposal Relief), which also has the potential to be changed or removed at the Budget.
You can read more on the impacts on business disposals / sales and how to wind up a solvent company using an MVL arrangement here.
Political balancing act
Chancellor Rachel Reeves has not ruled out the possibility of raising CGT in the upcoming budget. However, she faces a difficult balancing act.
On one hand, there is a clear need to generate revenue to fund vital public services. On the other hand, Reeves has emphasised the importance of not hindering economic growth. She has indicated that any tax policy changes will aim to strike the right balance between these competing priorities.
Reeves’ cautious stance reflects the broader debate within the government. While there is pressure to increase taxes to address budgetary shortfalls, there is also a recognition that higher taxes on investment could harm the economy. All eyes will be on the government’s decision regarding CGT at the upcoming Budget and its potential ramifications for the UK economy.
A reminder on which assets can attract CGT
Capital Gains Tax (CGT) is liable on the profit made from the sale or disposal of certain assets. Here are the key types of assets on which CGT may be payable:
- Property:
- Second Homes and Investment Properties: CGT applies when you sell a property that isn’t your primary residence, such as a second home or a rental property.
- Land: The sale of land, whether developed or undeveloped, is also subject to CGT.
- Stocks and Shares:
- When you sell shares or other investments like unit trusts, and they’ve increased in value since you bought them, you may be liable for CGT.
- Business Assets:
- Selling business assets, such as buildings, machinery, or company shares, can trigger a CGT liability.
- Valuable Personal Possessions:
- CGT may be payable on personal possessions (chattels) that are worth more than £6,000 (£3,000 from the tax year beginning 6 April 2024), such as antiques, art, jewellery, or collectables.
- Cryptocurrency:
- Gains made from selling or trading cryptocurrency are also subject to CGT.
- Intellectual Property:
- If you sell or assign rights to intellectual property, such as patents or trademarks, CGT may be due on any profit.
- Trusts and Estates:
- If you are a beneficiary of a trust or estate that sells assets at a gain, CGT might be payable on your share of the profits.
Certain exemptions and reliefs, such as the annual CGT allowance, may reduce or eliminate your CGT liability, so it’s important to understand how these apply to your specific situation.
Stick or twist: Navigating CGT uncertainty
As the October Budget approaches, it is not yet possible to predict whether there will be changes to Capital Gains Tax. However, given the ongoing debate and potential implications, it is prudent to review your exposure to any potential changes.
Understanding how these shifts could affect your investments (especially in property) or whether it is worthwhile to bring forward disposal plans, may be options to consider.
If you need guidance on how to navigate these potential changes, contact us to speak with an experienced CGT advisor who can help you plan accordingly.
Oscar heads our tax department and provides advice on tax structuring, planning and compliance services to entrepreneurs and their businesses.