Almost four months after the Labour victory in the general election of early July, Chancellor Rachel Reeves finally delivered the new government’s first Budget on 30 October 2024.
Since taking over the keys of 10 Downing Street, Prime Minister Keir Starmer and his team had consistently telegraphed the likelihood of “painful” tax hikes. As well as the alleged £22 billion “black hole” in the public finances, in order to ensure that government departments’ funding kept pace with inflation, a further £18bn needed to be raised, meaning that Reeves’s overall measures would need to raise annual tax revenues by £40 billion by 2030.
Having specifically ruled out rises in income tax, VAT and employees’ National Insurance, Reeves was severely restricted as to where the money could come from. As was widely expected, Capital Gains Tax (CGT) proved to be one of the key sources.
The main rates of Capital Gains Tax have increased
In the weeks leading up to the budget, rumours had circulated that the CGT rate might rise to as high as 39% – although Keir Starmer had dismissed such speculation as being “wide of the mark”. Although the reality did indeed turn out to be more benign than some expected, it is nevertheless a significant hike from previous levels. The changes mean you are likely to pay more tax when selling assets.
CGT is a tax you pay if you make a gain when disposing of assets such as:
- Investments that are not held in a tax-efficient wrapper, like an ISA or pension
- Personal possessions worth more than £6,000 (excluding your car)
- Property that is not your main home
- Business assets.
In 2024/25, you can make gains of up to £3,000 before CGT is due. This is known as the “Annual Exempt Amount”. If gains exceed this threshold, you may be liable for CGT.
Under the new rules:
- Basic rate taxpayers: the rate has increased from 10% to 18%
- Higher or additional rate taxpayers: the rate has increased from 20% to 24%
These higher rates were already in force for gains from second homes and buy-to-lets, so the new rules mean that gains on all types of property are now aligned.
Remember, gains are added to income when calculating CGT, so large taxable gains taken by basic rate taxpayers, or even non-taxpayers, can mostly be at the higher rate.
The changes Reeves announced to CGT rates came into effect immediately on 30 October 2024.
- Business Owners
There are two reliefs which have benefitted business owners and investors:
- Business Asset Disposal Relief (previously Entrepreneurs Relief): typically available if you own 5% or more of the shares of a trading company and have held them for at least two years.
- Investors Relief: available for holdings of unlisted shares, in a trading company, issued on or after 17 March 2016 and where neither you, nor someone connected to you, is connected to the company.
Both rates will remain at the current 10% for the 2024/25 tax year but will then rise to 14% and 18% over the next two tax years respectively. As of 2025/26, the lifetime allowance for Investors Relief will reduce from its current £10m to the same £1m limit as BADR.
- How might I be able to mitigate CGT?
It may now be more important than ever to consider how to reduce your CGT liability as part of your financial plan. For example, you could:
- Spread the disposal of assets over several tax years
- Focus on increasing investments held in a tax-efficient wrapper
- Pass on assets to your spouse or civil partner to make use of their Annual Exempt Amount.
- Make use of losses
We could work with you to understand if you may be liable for CGT and the steps you might take to mitigate a large or unexpected tax bill.
A financial review could help you assess whether your current plans are still the right option for you in light of the changes.
Let’s pick this up again at your next annual review.
We’ll cover this and any other budget changes which may affect you at your annual review but if you’d prefer not to wait, then please do get in touch.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning or tax planning.