How to solve a problem like Capital Gains Tax?

This is a not a surprising suggestion from the Chancellor of a new Government – you want to get the bad news out of the way early in your tenure and it now seems certain that Rachel Reeves will make changes to Capital Gains Tax, Inheritance Tax and pensions tax relief.

She has backed herself into a corner in standing by her pledge not to increase Income Tax, National Insurance, VAT and Corporation Tax, which account for 80% of the UK’s total tax revenues. Arguably, the big freeze on personal tax allowances and thresholds is an Income Tax increase by the back door, but that’s for another day.

So, how does the new Chancellor solve a problem like Capital Gains Tax. Firstly, it doesn’t raise very much – £14.5bn in 2022/23, and this is £2.5bn down from the previous tax year. That represents less than 2% of the total tax take.

So, is it even worth the hassle, and does increasing the rate do more harm than good to the economy and dent the Government’s growth agenda? You could probably argue the same about VAT on private school fees and abolishing the non-dom rules.

Given the early tone from the Labour Government, and Rachel Reeves in particular, an increase to Capital Gains Tax looks to be nailed on.

What are the Chancellor’s options?

A review by the (now disbanded) Office of Tax Simplification in 2020 recommended that Capital Gains Tax should be aligned to Income Tax. I personally don’t think this will happen, but if it does, there should be a form of inflation allowance or taper relief depending on how long you have owned the asset – there could also be a more generous taper relief for business assets. Sound familiar? Rachel Reeves follows many of the same economic principles as Gordon Brown, the architect of taper relief, which was abolished by Brown’s successor, Alistair Darling in 2008.

I think that Capital Gains Tax will increase, but not aligned to Income Tax – I can see the rate increasing to 25%-30%, and a lower rate (maybe 20%) for sales of business assets. To me, it would make sense to have a flat rate of Capital Gains Tax of 24% – we have five different rates of Capital Gains Tax which is unnecessarily complicated.

A rate change is the easiest to introduce – but there are questions for me as to how much it will actually raise, so what’s the point? There are some other aspects of the Capital Gains Tax regime that could be reformed:

1. Abolish the £1m business asset disposal relief limit
2. Tax lottery and gambling wins (but you might need to give relief for losses)
3. Remove the Capital Gains Tax exemption for ‘wasting assets’ such as wine and classic cars
4. Remove the £3,000 capital gains annual exemption
5. Cap the amount of principal private residence relief someone can claim in their lifetime (although Keir Starmer said during the General Election campaigning that principal private residence would be left alone)
6. Remove the capital gains base cost uplift on death (but this may come as part of reforms to Inheritance Tax)

When would all this happen?

The timing of any tax change is interesting – mid-year rate rises are unusual and complicated, and you also miss out on tax revenue from the behavioural response of people crystallising capital gains before the change takes effect, if it’s at the start of a new tax year. But, Rachel Reeves seems to be acting with some urgency and vindication e.g. introduction of VAT on private school fees which is effective earlier than expected and there is quite severe anti-forestalling. Therefore, a mid-year rate rise now seems more likely than not.

Selling listed shares standing at a capital gain is practically straightforward, but you need to watch out for the ‘bed and breakfasting rules’. If you are in process of selling your private business, or perhaps a property, this is difficult as you are in the hands of others so can’t fully dictate the timeline. There can be options to crystallise a capital gain, but this is not without risk – taking such action would essentially mean you are committed to paying the associated tax by 31 January 2026 (if you are taking action in the current 2024/25 tax year) and you would be relying on any transaction completing and receiving the proceeds by then.

A further consideration might be around any contemplated plans to leave the UK to work or generally become resident in another country – this is a big decision with a lot to consider anyway, but bringing forward such plans could change your tax status in the UK including whether you are liable to UK Capital Gains Tax on a relevant disposal that takes place after you have left. Although it is highly unlikely, the Government could consider a form of exit tax to discourage non-residency – this could take the form of a deemed market value disposal of assets at the point of becoming non-UK resident.

Decisions, decisions, decisions. The uncertainty is the issue. I’ve spent too much of my adult life second guessing what a new Government may or not do. The best advice is to talk through the options and make a decision, which may be taking a hedge or simply doing nothing.

Would you like to know more?

If you would like to discuss the above and how it may impact you, please get in touch with your usual Blick Rothenberg contact or Nimesh Shah using the form on this page.