The Impact of Government Changes on Capital Gains Tax

The general election has come and gone, and so too have the Conservatives’ run in power. For the first time in 14 years, the Labour Party is again running the country. 

In the world of estate planning, a change in government brings about the most change in taxation, and this year’s election has been no different. In particular, capital gains tax has become a focus; this article aims to consider what impact the new government might have on CGT and what this means.

Understanding Capital Gains Tax

Capital gains tax (CGT) is a tax on gains made from a sale of property (other than your primary residence), investments and other assets. It is essentially a tax that accounts for any increase in the value of an asset between purchase and sale – if one buys a house for £500,000 and sells it for £600,000, they will have to pay CGT on the £100,000 difference (minus allowances).

CGT is a significant consideration for estate planning, as actions such as gifting a property or selling it as a personal representative are chargeable disposals, which incur a CGT liability. Additionally, if one were to sell a business, this too would invite CGT.

Developments Pre-Election

Whilst the rate at which CGT has been taxed has remained steady over the last few years, the tax free allowances have dried up.

In the tax year 19/20, the normal allowance for CGT was £12,000. This was then increased to £12,300 in 20/21. However, in 23/24, this allowance was slashed in half to £6,000. This was then decreased a second time to £3,000, which is the current annual allowance.

This sudden decrease in the annual allowance has meant that despite the lack of tax rate increases, taxpayers have been paying more CGT. There is, therefore, a reasonable expectation that, if anything, this allowance will be pulled back further by the new government.

Labour's Proposals for CGT

Labour has been largely silent on its plans with CGT. They have not made any official proposals regarding CGT beyond a promise not to make the sale of primary residences taxable. 

This, however, does not mean that no changes will be made.

Labour has contended that they will not increase tax rates in their plans, though the Guardian has reported that they are considering raising capital gains tax and altering inheritance tax.

Without a clear proposal on CGT, those potentially affected may wish to exercise a degree of caution in the upcoming months, as an increase or decrease in the level of CGT can have a knock-on effect on the attractiveness of certain investments and transactions.

Impact on Taxpayers

Though fewer than 3% of UK adults between 2011 and 2020 paid any CGT (according to Etherington), CGT brings in a considerable amount for the Treasury. For example, it is estimated to have brought in £15bn in the 23/24 tax year. This could incentivise an increase in the tax rate by the new government. 

However, increasing the tax rate may deter taxpayers from making large disposals altogether; such a move would be seen as anti-business and would reduce the amount of funds generated by the Treasury. 

Conversely, a decrease in the rate may encourage more disposals from taxpayers to take advantage of lower rates, though this means that the government would receive less money per disposal. 

Until Labour has made its plans clear, those with chargeable assets should consider the steps they can take to best protect their position.

Considerations for Estate Planning

It must be said that those with Property are at risk, as a significant rise in CGT can lead to disposals becoming less profitable. Income tax on rent paid and its lack of liquidity may make it more expensive for those with significant investments in Property going forward. Property owners may consider selling their assets and diversifying as a result.

Similarly, business owners may find that selling in the UK, with an enhanced rate of CGT, is far less beneficial and may consider selling outside the UK. 

Making anticipatory changes can be beneficial for those who are concerned about estate planning. However, taxpayers should also be careful not to act too drastically before Labour has made changes to the tax regime. Steps can be taken to guard an estate from paying large amounts of tax and to ensure that your beneficiaries get as much of your estate as possible. Each person and case is different; it is always best to obtain advice before taking any steps.

 Feel free to call 01206 217611 or email [email protected] to discuss this further.