Should I rush my second home sale to beat a budget tax rise?

First published by The Times here.

Question:

Me and my three siblings inherited a holiday home some years ago that we are in the process of selling. We have a buyer and expect to exchange at the end of October. Given the rumours about a possible capital gains tax rise in the budget on October 28, is it wise to offer a chip on the sale price as an incentive to expedite the sale to exchange before then? Would a tax rise take effect immediately? Or are there any other ways to mitigate it?

Nimesh responds:

Your concern is understandable. I cannot remember a budgetwhere there hasn’t been speculation about a capital gains tax(CGT) increase, and people naturally ask whether they shouldaccelerate transactions to beat any changes.

The first point to note is that, for CGT purposes, the key date inthe property chain is generally the exchange of unconditionalcontracts rather than completion. This means that if contractsare exchanged before a tax increase takes effect, the transactionwould normally fall under the existing rules even if completionhappens later.

The difficulty, of course, is that nobody knows whether the chancellor will increase CGT rates, by how much, or when any changes would apply.

Recent reports have suggested a CGT increase may no longer be under consideration by John Healey, the chancellor, but tax planning based on budget speculation is rarely a sound strategy anyway.

If the tax were to rise it may happen quickly. While most tax changes take effect from the start of a new tax year, CGT has a history of being treated differently. In the June 2010 budget the CGT rate for higher and additional-rate taxpayers was increased from 18 per cent to 28 per cent on budget day itself.

CGT rates increased with immediate effect in the 2024 budget, too. These examples demonstrate that although mid-year tax rate changes are unusual (and create complexity in the tax system), governments have not hesitated to introduce overnight increases where they believe advance notice of a rise would encourage taxpayers to bring forward disposal of assets and lock in lower tax rates.

I would be cautious about offering a reduction in the sale price simply to secure an earlier exchange to beat a tax increase that may or may not happen.

The key question is whether the potential tax saving exceeds the value being sacrificed. For example, if your share of the gain were £100,000 and CGT increased by four percentage points, your additional tax cost might be £4,000. If accelerating the transaction requires a discount larger than that, you could end up worse off overall. In effect, you would be paying more to avoid a potential tax increase than the increase itself — if there even is one.

It is also worth remembering that the gain will be divided between four siblings, each of whom will be taxed separately on their share of the profit and have their own CGT-free annual allowance of up to £3,000. In addition, because the property was inherited, the gain is generally calculated from its market value at the date of death rather than what the deceased originally paid for it.

The most effective CGT planning is usually undertaken well before a sale is contemplated, not when contracts are on the verge of being exchanged.

My advice would be to focus on achieving the best commercial outcome. If exchanging before the budget is possible without affecting the agreed price, the certainty may be attractive. But I would be reluctant to sacrifice sale proceeds based solely on rumours. A tax rise may never materialise, whereas a price reduction is immediate, certain and irreversible.