As we patiently await Budget Day later this month, Head of Tax, Cathy Revis, has continued her quest to cut through the “fake news” and uncover the facts about what we can expect. The future of Capital Gains Tax (CGT) has prompted a lot of speculation, with the media fueling anxiety with sensationalised headlines. In this installment, Cathy shares the key facts we can know for sure.
Current state of CGT
CGT currently raises around £15 billion annually, accounting for less than 2% of total tax revenues, and affects fewer than 300,000 taxpayers. More people were brought into the CGT net when the Conservative government reduced the annual CGT exemption from £12,000 to £3,000. HMRC projected this will net £300 million to Treasury funds in 2024/25.
Will Labour increase CGT rates?
Labour has not made any official statements regarding CGT rate changes, committing only to not raising Income Tax, National Insurance, VAT or Corporation Tax. Chancellor Rachel Reeves has said “I think we will have to increase taxes in the Budget,” but has consistently stated that there are “no plans” to raise CGT. This was, however, before she announced that there was a shortfall of £22 billion for this financial year.
Some Labour MPs have backed aligning CGT rates with income tax, an idea previously recommended in 2020 by the Office of Tax Simplification. They also proposed taxing cash within companies at dividend rates upon retirement instead of CGT—an unsettling idea for many business owners, Cathy notes. Another suggestion was to simplify the system by reducing the current four rates to just two. However, an increase in rates does not increase the tax take pro-rata, as many people can choose whether to sell an off asset.
As mentioned in part one of Cathy’s installment, although tax increases on Budget Day are unlikely, they have happened before and can’t be entirely ruled out (e.g. Chancellor George Osborne in 2010, raising CGT from 18% to 28%).
Business Asset Disposal Relief (BADR)
As a tax expert, one of the other notable questions Cathy is being asked is whether Business Asset Disposal Relief (BADR) will be scrapped. Critics of the BADR including the OTS and Sir Edward Troup have stated that BADR is misaligned with its original purpose of encouraging investment and growth (something that Cathy expressed having strong opinions on in her original post).
Reducing the lifetime allowance for BADR to £500k, increasing the tax rate from 10% or extending the qualifying time limit from two years could generate significant savings for the Treasury. All we have heard, Cathy reminds us, is that Reeves would “review every relief”.
The removal of the tax-free CGT uplift on death, proposed by the OTS in 2020 for assets qualifying for IHT Business Relief, has also been recommended by the Demos report, IFS and an All-Party Parliamentary Group.
This leads us onto Cathy’s third topic to be discussed in the lead up to the Autumn Budget: Inheritance Tax. Look out for the next installment of her no-nonsense tax talk, and read her full rundown on CGT here.
Still unsure how the October Budget changes may impact your taxes? Contact Cathy Revis for more detailed business guidance on 02380 332 733 or email cathyrevis@fiandertovell.co.uk