Autumn Budget

Capital Gains Tax (CGT) requires major reform. At least, that is the Institute for Fiscal Studies’ (IFS) view. They published a report on the 6^th of October, ahead of the Autumn Budget advocating the alignment of CGT with marginal Income Tax rates.[1][2]They underpinned this with recommendations for significant change to the way the tax is generally implemented. This is not the first time we have heard this either. The Office of Tax Simplification (OTS) published a policy paper on CGT for the then Chancellor, Rishi Sunak, in 2020.[3] In the paper, they suggested reducing the annual exempt amount, closely aligning Capital Gains Tax rates with Income Tax rates and the end of what used to be called ‘Entrepreneurs Relief.’ You would be forgiven for thinking the same people produced both reports. Since the OTS’s paper, the individual annual CGT exemption has been slashed from £12,300 down to £3,000, in line with their recommendations. So, is it time for the rest?

During the 2024 election campaign, Labour consistently asserted that Income Tax, National Insurance, VAT, and Corporation Tax would not be raised. Yet, they remained quiet regarding Capital Gains Tax. They were purposeful in leaving it out. It left the door wide open to increase this tax if they needed to. Then came the Chancellor’s first financial statement to Parliament. In it, she identified a significant ‘black hole’ in the public’s finances to the tune of £22 billion.[4] Something the Government have been clear they will need to address in the upcoming “tough” budget. One thing I would be happy to stake my mortgage on, is that taxes are going to increase in October. Where and how are the questions. However, as aforementioned, headline tax rises were ruled out in the Labour manifesto and ‘taxing the rich’ is a reasonably straight forward political presentation when it comes to CGT. This is despite the fact that the reduction in the annual exemption to £3,000 can easily mean ‘ordinary working people’ may now find themselves with CGT exposure. As such, if I had to pick the main taxation in the crosshairs, it would be Capital Gains Tax.

Since the introduction of Capital Gains Tax in the 1960s, CGT is currently at its lowest recorded level. Prior to 2008, the higher rate of CGT had never fallen below 30% (currently 20%) and, prior to 2006, the basic rate did not fall below 20% (currently 10%). I have excluded CGT applied to relevant property sales from these figures, but the trend is the same. Historically, it has never been cheaper to make a gain on an asset in the UK. This, of course, will help the Chancellor in potentially following the IFS’s and OTS’s recommendations in aligning Capital Gains Tax rates with marginal income tax bands. This does, though, also highlight another thing. If you are sitting on capital gains that can’t be crystalised using your annual exemption alone what, quite frankly, are you waiting for? You can only really be waiting for one, or all, of four things:

1. To die – currently CGT dies with you.
2. For the liquidity to pay your CGT bill.
3. The value of your asset to fall.
4. For CGT to reduce at some point in the future. Thereby making it cheaper to access your money.

Of course, you may also not want to sell your asset for emotive reasons that relate little to the money it can make for you and the tax you may pay.

The IFS recommended removing the existing benefit of CGT being re-based on death. Labour may announce this at the upcoming budget, alongside rate increases, which would see the first of these null and void. However, it is far from certain that a change to CGT upon death will definitely be announced. On point two, when you realise a gain, you trigger a sale event, which typically creates liquidity and thereby provides the means to pay your tax bill. It can be challenging to watch your gross value reduce when you trigger a gain, but one should remember that it is the ‘after-tax’ or ‘net’ value that actually matters. If CGT rates go up and you choose to not crystalise gains prior to this, it is a matter of fact that the net value of your asset will reduce. Assuming there are gains on the asset of course. On the third point, I have over the years, genuinely heard people suggest that waiting for their asset to fall to reduce their gain, or even crystalise losses, is a sensible strategy. This defies any reason – if you are confident the value of your asset is going to fall over time, please don’t hold onto it for the sole reason of saving tax. It is a guaranteed route to reducing your overall wealth.

So, setting any impending death to one side, the only thing you are really waiting for when choosing to not realise a gain is for CGT to go down. Not just down, but to lows they haven’t reached in almost 60 years since CGT was introduced. This, for me, seems unlikely at best. If Labour chooses to make no changes to CGT in the budget and you had decided to realise your gains, you would be no worse off. You would simply have paid the same tax bill now rather than in the future. Of course, you may think CGT rates will go lower than 10% and 20% for basic rate and higher rate taxpayers respectively when this Government leaves office. However, even with a change of Government, history would provide for terrible odds of this occurring.

This is where it is important to flag that my prediction that CGT will go up, is a prediction. In fact, I am already hearing leaks that the Chancellor is planning not to implement a flat pension tax relief of 30%, which I suggested could be the case in this article last month. Indeed, my wife often reminds me that I am wrong on a regular basis about all sorts of matters! Personally, though, I have already chosen to realise any gains I have and consequently pay any CGT I owe this tax year. There was an internal emotional pang when I decided this, as there is when you know you are going to trigger any tax bill. However, I know that even if I am wrong and the Government don’t touch CGT, this decision will most likely not reduce my overall wealth. Consequently, ‘action’ feels fairly low risk. I’m not sure CGT will ever be lower than it is now. It is important to note that everyone’s circumstances are different, and you should take advice prior to making any significant decisions when it comes to realising gains.

There are some reasons why Rachel Reeves may choose to leave CGT alone. She could break a manifesto pledge instead. If they simply returned National Insurance rates to their previous levels, prior to their reduction under the last Government, that would be enough to fill the ‘black hole’. However, Starmer’s popularity has taken a nosedive, and breaking promises is never popular. A more likely reason they may avoid it, is that doing so could bring in little revenue. HMRC’s own projections estimate that raising the higher CGT rate by 10% would actually lead to a £2.025bn decrease in revenue by 2027-28![5][6] This is due to people choosing not to crystalise their gains, moving abroad or making greater use of tax vehicles that can shelter assets from CGT. The IFS have considered this in their recommendations though. They aren’t suggesting the Chancellor simply raises rates but overhaul the way CGT is applied altogether. They include measures to tackle people leaving the UK to realise gains and reducing the ways gains can be sheltered. Reeves could decide to take some, or all, of their advice which may remove some of her nervousness about causing a reduction in tax revenues by making the changes. In addition, the Chancellor has attempted to position herself as ‘growth orientated’ and ‘business friendly’ on numerous occasions. Executives at FTSE 100 firms are claiming that the government aren’t listening when it comes to CGT and small business owners are decrying the suggestion that the Government may remove Business Asset Disposal Relief.[7][8]Failing to listen to this group could quickly re-establish Labour as an ‘anti-business’ party.

So, will Capital Gains Tax go up in the Autumn budget? I can’t be certain but, on balance, I think it most likely will. Whilst I’ve explored both sides of this argument, it is even more unlikely that CGT is going down any time soon, possibly ever. So, if you have gains, perhaps take some time to reflect and review your position.