Reports suggest Rachel Reeves is weighing various tax increases, including changes to capital gains tax, as she aims to strengthen public finances.
The Chancellor should consider a reform of capital gains tax (CGT) in the upcoming budget to boost revenue and economic growth, according to the prominent think tank The Institute for Fiscal Studies (IFS), which is the UK’s leading independent economics research institute.
In their recent capital gains tax reform report The Institute for Fiscal Studies (IFS) believes that the current CGT structure “leads to reduced investment and skewed patterns of capital allocation, CGT acts to lower productivity. We are collectively made poorer by a poorly designed CGT”.
CGT is a tax on the profit made from selling an asset that has increased in value. It currently generates around £15bn annually for the Treasury.
The typical CGT rate is 20% on most taxable assets, except for residential property not used as a primary home, which is taxed at 24%. In comparison, the higher rates of income tax are set at 40% and 45% respectively.
The IFS report confirms that “CGT rates vary across assets. They are lower than tax rates on earned income and, in most cases, income from capital. These rate differentials are unfair and create a range of undesirable distortions”.
For this reason one of the key points that the IFS supports is “aligning marginal tax rates across all forms of gains and income, while reforming the tax base”.
The uncertainty around the proposed increase in CGT rates may be one of the reasons behind the upsurge of larger homes being sold (some by investors) trying to avoid a higher capital gains tax bill after the 31 March 2025.
BADR entrepreneurs relief reform
Specifically, the IFS report criticised the business asset disposal relief (previously entrepreneurs relief) which currently gives a lower rate of CGT for business owner-managers.
The IFS reports that “Business asset disposal relief should be scrapped in favour of more generous deductions for investment costs. Removing CGT uplift (or ‘forgiveness’) at death should also be a priority”.
Capital gains tax and the Autumn budget 2024
The first budget for the new chancellor Rachel Reeves is on 30th October 2024 and may bring changes to how capital gains tax is charged in the UK.
The IFS importantly points out that “The government should seek to make reform credibly lasting. It should set out clear principles and a rationale for reform and commit to the new regime for the length of the parliament. Instability and unpredictability are bad for investment”.
In the 2023/2024 tax year the conservative government reduced the capital gains tax allowance (annual investment allowance) to £3,000 per tax year for all individuals.
If the new government do impose some changes to the CGT system you should review how they may affect your investment goals now and in the future too.
