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Might we see changes to Capital Gains Tax after the election?

7th June 2024

Might we see changes to capital gains tax as the Labour Party confirm there will be no rises in income tax or National Insurance?

(See also our Election Tax Watch for more insights)

Rachel Reeves, the shadow chancellor to the Labour Party announced on 26 May that there will be no rises in income tax or National Insurance if the Labour Party wins the General Election on 4th July. 

This was reaffirmed by Keir Starmer in the first TV debate of the General Election. 

Labour have previously announced that they will also not increase the headline rate of corporation tax for the duration of the next Parliament.

There is some speculation in the press, in advance of the launch of the Labour Party manifesto, as to whether changes may also be made to capital gains tax (CGT), either increasing the rate payable, or changing the reliefs available.

In the context of press speculation and rumour it is always helpful to take a look back to have a sense of what may be ahead of us.

How much tax revenue does capital gains tax raise?

The Office for Budget Responsibility estimate that CGT will bring in £15.2bn of tax revenue in this current tax year – just 1.3% of all tax receipts. Even significant changes to capital gains tax won’t have a large impact on Government finances.

How has capital gains tax changed in recent years?

We have already seen some significant changes to CGT in recent years.

The annual exemption, which is the net gains an individual can realise in a tax year before paying CGT, has reduced by over 75%, from £12,300 a year to just £3,000 from 6 April 2024. 

This was forecast to increase tax revenues by ‘just’ £275m in this 2024/25 tax year. This is a change that doesn’t raise significant amounts of tax, but it can increase individual tax liabilities and the complexity of their annual tax reporting to HMRC.

Looking back a little further at other CGT changes, in March 2020, we had Rishi Sunak as then Chancellor announce a reduction in the lifetime limit for business asset disposal relief (previously entrepreneurs’ relief) from £10m down to £1m. 

These are the gains entrepreneurs can realise from selling their business, paying a reduced tax rate of 10%. When the change was made it was anticipated to increase tax revenues by £1.8bn by this current 2024/25 tax year.

We have also seen focused tax changes in the form of higher rates of tax applying on specific types of assets, including residential property and certain private equity investments.

Looking further back?

The history over the past 60 years provides some helpful insights as to what we see in the future. Often, tax policy takes ideas from the past. So, lets take a look…

Some people may speculate that CGT rates could be increased in line with income tax rates.

When CGT was first introduced by James Callaghan as Chancellor in 1965, the rate was set for most gains at 30%, someway below the rate of income tax at the time. The rate was, however, increased from 1989 by Nigel Lawson, to align CGT with income tax. From 1989 until 1998, capital gains were taxed as a the top slice of income.

Then, in his second Budget as Labour chancellor, Gordon Brown brought in the tapering relief from April 1998. 

While the main rate stayed at the same rate as income, the gain was tapered down, reducing the effective CGT rate payable to a rate as low as 10% for business assets and 24% for non-business assets, depending on how long the asset had been held for – the longer it was held, the greater the reduction in the effective tax rate.

This tapering relief was uncapped and was eventually seen as unsustainable in response to reports in the summer of 2007 that the CGT rules were enabling private equity bosses to pay less tax than their cleaners. 

Alistair Darling subsequently announced in his October 2007 Pre-Budget statement that the tapering relief would be replaced by an 18% flat rate CGT.

The new entrepreneurs’ relief was then introduced in response from business owners and entrepreneurs to the 80% tax increase from 10% to 18%, which led to the system that we now have in place.

Looking to the future?

The past provides some useful context for what the future tax landscape may look like for capital gains. We will need to wait until we see the party manifestos, which may be released in the next few days or week.

We could well see a realignment of CGT rates with income tax rates, as we have had this in the past - although Rachel Reeves has said that a ‘wholesale equalisation’ of income tax and capital gains tax rates could hurt investment.  

We have also had a range of reliefs to encourage enterprise and entrepreneurship in the past 25 years, with both the tapering relief and the entrepreneurs’ relief introduced by Labour Governments.  We will need to wait and see what the manifestos offer to support enterprise and entrepreneurship.

Solvent liquidations

If CGT is at risk under a labour Government, solvent liquidations would become less attractive. This has led to increased solvent liquidation work for our Restructuring Team over the last year or so as some business owners have become concerned about potential changes.

What action should people take if they are concerned about the impact of any changes?

Firstly, it will be important to wait and see what is included in the party manifestos.  

Any changes to CGT, if there are any, would not come into force until sometime after the General Election. Rachel Reeves has ruled out having an emergency Budget shortly after the General Election if they were to win. 

She has said that they will wait until they have forecasts from the Office of Budget Responsibility, which would take approximately 10 weeks to commission. The first Labour Budget would therefore likely not be until the Autumn. Any changes might come into force from that date or,  perhaps more likely, from the beginning of the next tax year, from 6 April 2025.

There should therefore be time to assess the implications and options over the course of this year and consider your actions in the context of your wider affairs. 

It is always a high-risk approach to trigger a voluntary tax liability based on speculative tax changes and it is important to consider the options available to you, which could be to do nothing.

Contact us

If you believe you may be affected by the possible changes, please contact your usual Bishop Fleming advisor, or contact our private client team.     

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