Upcoming Budget - potential changes to Capital Gains Tax

The UK’s Chancellor, Rachel Reeves, is set to deliver her first Budget on 30 October and it is anticipated to bring significant changes to the tax landscape. With the Government having identified a funding shortfall of £22 billion, it seems almost inevitable that tax rises are on the way, with capital gains tax (CGT) squarely in the Chancellor’s sights. 

We’ve outlined some potential changes and key considerations that may be relevant before, and after, Budget Day.

Current CGT position

At present, CGT is charged at a top rate of 20%, except for residential property gains, which are taxed at 24%, and carried interest gains, taxed at 28%. Business Asset Disposal Relief (BADR) can reduce the rate to 10% for qualifying disposals up to a lifetime limit of £1 million. Investor Relief also offers a 10% rate, with a lifetime limit of £10 million.

Although CGT contributes only a small percentage to the overall tax revenue, it has become a focal point due to Government manifesto promises not to raise income tax and National Insurance for workers, corporation tax and VAT (other than publicised changes).

Possible CGT changes

There are a number of changes the Chancellor could make to CGT:

1. Increase CGT rates: a rise in the CGT rate seems highly likely with press reports suggesting a main rate as high as 39% is being considered. Such an increase in rates may also see the re-introduction of an indexation relief to take account of inflation. 
2. Changes to BADR and Investor Relief: BADR could be limited or abolished entirely. Investors Relief may also be at risk, potentially impacting long-term investors in unlisted trading companies. This could help plug the fiscal ‘black hole’ as HMRC estimates that both reliefs cost as much as £1.5 billion annually (with Investors Relief making up a very small proportion). 
3. Reduction or elimination of the annual exemption: The annual CGT exemption, currently set at £3,000, would be a simple relief to abolish, although with limited financial impact.
4. Base cost uplift on death: The removal of the capital gains base cost uplift on inherited assets is a possibility and estimates suggest the lost tax revenue from this is around £1.5 billion.
5. Timing: it is possible any changes may apply as early as midnight on Budget Day, although typically changes come into force from the start of the next tax year on 6 April.  

Possible pre-Budget actions

With potential changes looming, some actions may be worth considering depending on your circumstances:

• Completing transactions before 30 October: For selling shareholders with ongoing deals it makes sense to try and complete them before 30 October to secure current CGT rates and reliefs (subject to any retrospective anti-avoidance legislation).
• Transaction structure: If you're selling assets, opting for upfront cash consideration rather than shares or loan notes may be preferable, as broadly this fixes the CGT liability at the time of the sale, rather than at the later disposal of the shares or loan notes.
• Earn-out clauses: For deals involving earn-outs, structuring these as reverse earn-outs could be more tax-efficient (subject of course to commercial considerations). This approach seeks to ensure that the earn-out amount is brought into account in full for CGT purposes at the time of sale.
• CGT elections: If you are eligible for BADR, it may be possible to elect to trigger a CGT disposal in respect of share or loan note consideration and lock in the current 10% BADR rate.

While these steps may offer some advantages, professional advice is essential to ensure that the specific tax implications are fully understood.

Looking ahead

While the contents of the Budget remain under wraps for now, it’s clear that it could have significant consequences for entrepreneurs, investors, and business owners. We recommend keeping a close eye on developments and speaking with a tax advisor about the impact of the Budget on your specific circumstances.

For more tailored advice, please reach out to our Corporate Tax team.