Given the warnings of tax increases in the Budget by both prime minister and chancellor, together with the government’s self-imposed limitations to increases for ‘working people’ (ruling out changes to income tax, National Insurance contributions (NIC) and VAT), concern is rife as to what to expect with capital gains tax (CGT).
CGT is the favourite tip for those predicting where Budget increases will fall.
Its pundit popularity comes despite the fact HM Revenue & Custom’s (HMRC) own ready reckoner suggests a substantial increase in the tax rates would lead to a fall in receipts.
If a sale is going to take place anyway, ensure it is executed sooner rather than later
There were only around 350,000 individuals who realised enough gain in 2022/23 to face a CGT bill, with less than 2% of that select population accounting for 57% of the £13.6bn paid.
HMRC’s stance is that higher CGT rates would mean more wealthy individuals choosing to keep their gains unrealised – although that is not a view shared by some think tanks.
For example, the Resolution Foundation reckons raising CGT rates to match the marginal rates faced by employees (16% for basic-rate taxpayers, 32% for higher-rate taxpayers and 37% for additional-rate taxpayers) and reintroducing indexation relief would raise £7.5bn a year – about a 50% increase on projected 2024/25 CGT receipts.
The speculation has raised the question: can CGT be changed mid-year?
The precedent of a new chancellor making a mid-year change to CGT rates in their post-election premiere already exists.
The one question mark over a mid-year change is – ironically – whether more tax might be raised by deferring it to 6 April 2025
In his 22 June 2010 Budget, then-chancellor George Osborne raised the CGT rate for those paying more than the basic rate of income tax from 18% to 28% for disposals from 23 June 2010.
By 2010, Budget changes usually took effect from the day of their announcement, so it is unclear why there was a one-day delay – although many took advantage of the brief window. At the time, CGT was not expected to rise.
For individuals and trusts, CGT is generally accounted for on a tax-year basis, so a mid-year change causes none of the disruption that would be associated with income tax or NIC tweaks of the same nature. Even residential property sales have a 60-day period for reporting/payment (although this special treatment did not exist in 2010).
The one question mark over a mid-year change is – ironically – whether more tax might be raised by deferring it to 6 April 2025.
If the chancellor wants money as soon as possible, a deferral could well deliver more in the short term
The heightened CGT receipts following Office of Tax Simplification (OTS) reports on CGT reform are a lesson here. CGT liabilities in 2022/23 were less than in the two previous tax years, when the spectre of OTS-inspired reform existed.
If the chancellor wants money as soon as possible, a deferral could well deliver more in the short term. Indeed, this may already be happening, with a recent Financial Times article reporting a selling ‘frenzy’.
With this in mind – and only where clients are already planning to make a disposal in 2024/25 – you may wish to tell them to consider bringing that forward.
‘Don’t let the tax tail wag the investment dog’ is advice often applied when considering tax-incentivised investments. It is equally so for tax-incentivised dis-investments.
HMRC’s stance is that higher CGT rates would mean more wealthy individuals choosing to keep their gains unrealised
One way of considering any pre-emptive transaction is to think of it as an option contract, with the premium being the cost of the transaction and the associated pre-Budget CGT:
- If the Budget hikes tax and the option pays out, the profit is the saving in CGT between new and old rates.
- If there is no change, the premium represents either:
- An acceleration of tax and transaction costs that would have been paid at some future date, or
- A total loss, if the shares are held until death and if CGT uplift on death is then still in being.
If dividends and/or capital gains are also more harshly treated, then, as well as considering the obvious tax wrappers of pensions and Isas, there could be a stronger case for considering the tax management benefits of investment bonds going forward.
In closing, it would be remiss to not comment specifically on one of the major sources of CGT – the sale of business assets.
Currently, up to £1m of gains from the disposal of an interest in a qualifying business would be taxed at the lower rate of 10%. While this could be in the firing line, this is not thought to be a major target given the generally accepted importance of encouraging small business.
Having said that, as for investments generally, if a sale is going to take place anyway, ensure it is executed sooner rather than later.
Tony Wickenden is managing director of Technical Connection
Comments