Autumn Budget: possible CGT changes and pre-budget planning
With less than four weeks to go before the Autumn Budget, set for 30 October 2024, we wanted to share some of the highlights from our current Budget related conversations. As we previously reported in The “Blackhole Budget”? there is increasing speculation that Rachel Reeves will announce changes to Capital Gains Tax (CGT) in the Budget, having ruled out increasing income tax, VAT and national insurance for working people (does this leave the door open for an increase on employer national insurance contributions?). CGT has been the main topic of conversation and so we have set out, in this article, what we think the changes might look like and what, if any, pre-emptive action our private clients may be considering.
What changes may be introduced?
Whilst the Chancellor has not made any specific comments indicating what changes (if any) are being considered to the CGT regime, we think that the following are possibilities.
Increasing the rates of CGT
Rather than make any substantial changes to the CGT charging regime, the Government may simply choose to increase the rates of CGT. However, HMRC estimate that very large tax rate rises to CGT can reduce exchequer yield due to taxpayer behavioural impacts and that a 10% percentage increase on the higher rate of CGT would lead to a £2bn reduction in revenue by 2027/28. The Institute for Fiscal Studies (IFS) comment that simply raising revenue is not the right route and that the whole design of CGT is flawed.
Currently, for higher or additional rate taxpayers, CGT is charged at 24% on residential property and 20% on other assets; for basic rate taxpayers this reduces to 18% on residential property and 10% on other assets. These are historically low rates of CGT so the Government could, for example:
(i) introduce one higher headline rate (to, e.g. the higher residential property rate), for all assets and taxpayers; or
(ii) align CGT with income tax rates.
If a substantive increase is made to the rates of CGT, then we would expect some form of indexation, or taper relief to be re-introduced to allow for inflation, which will add to the complexity of the CGT regime.
Removing or limiting the CGT uplift on death
Under current rules, any capital gains or losses on assets held at the date of death are effectively extinguished – their value is “rebased” to the date of death value such that the recipient inherits the asset at that uplifted value rather than inheriting the deceased’s base cost.
The IFS has highlighted the relatively significant tax foregone (estimated to be about £1.5 billion) because of this rebasing on death and suggested that one solution would be to treat death as a disposal event for CGT so that CGT is chargeable at that point. Alternatively, assets could be inherited with their original base cost meaning CGT is not charged on death, but instead, are chargeable when the assets are subsequently disposed of by the recipient. The main argument against this action is that it could result in double taxation i.e. inheritance tax (IHT) and CGT being paid on the same event (i.e. death) and on the same asset.
An alternative is that this sort of change to CGT may be coupled with reform to IHT. For example, the current CGT uplift may be denied if the asset qualifies for IHT relief. This would remove the issue of double (and potentially punitive) taxation.
Risk to Business Asset Disposal Relief (BADR)
BADR, formerly known as ‘Entrepreneurs Relief’ currently applies a reduced rate of 10% CGT to qualifying business assets. It is possible that this reduced rate may be removed, or that the lifetime limit of £1million of gains that can qualify for BADR is reduced. Again, the IFS estimate that abolishing BADR would raise about £1.5 billion in tax revenue.
Reducing or removing the CGT annual exemption
The CGT annual exemption is currently £3,000 for individuals (and £1,500 for executors and trustees). This has been significantly reduced in recent years so it would not be a major change to remove this altogether now, but the fiscal impact is correspondingly likely to be limited.
Limiting or removing reliefs or exemptions
Removing the CGT exemption for “wasting assets” such as wine and classic cars is one possible strategy.
It is also possible that hold over relief will be removed for gifts of business assets and/or gifts into trust, meaning that CGT will be payable immediately on such an event rather than having the opportunity to defer that charge and pass the inherent gain on to the recipient.
Again, it is not clear that either of these measures would raise significant revenue for the Government.
When might any changes take effect?
Any change to the CGT rates or rules could be brought into effect from the new tax year (i.e., from 6 April 2025) but we cannot rule out that changes could be brought in with immediate effect from 30 October. In June 2010, for example, the Budget included an immediate increase in the rate of CGT for higher rate taxpayers from 18% to 28%. Plus, we already know that VAT will be applied on school fees from January 2025, mid-way through the school year.
If changes were brought into effect from the date of the Budget, that would leave no opportunity for any planning to be undertaken ahead of new rules or rates being introduced. Therefore, individuals standing on significant gains may be considering what pre-emptive action they could take now to crystalise gains at what are relatively low rates in a known CGT regime.
What action may be taken ahead of the Budget?
Accelerating gains by sale / gift or otherwise rebasing
Many clients have already taken pre-emptive action and crystallised gains, which may have led to sufficient revenue generation already from a CGT perspective.
Individuals who have not yet acted may wish to consider accelerating their liability for the gains by selling the asset. This crystallises the gain whilst there is certainty about the rates, but the individual will lose control of their asset.
Selling the asset to a (ongoing) trust (including potentially leaving the purchase price outstanding as an IOU) is another option.
Otherwise, gifting the asset to a (ongoing) settlor-excluded trust allows for the possibility of the gain to be held-over. However, the individual will not be able to derive any future benefit from the asset. Individuals can delay before deciding whether to holdover, but this strategy of ‘hedging your bets’ may be risky if the CGT rules change.
If the assets are quoted shares, sale and buy back (either after 30 days or through your spouse) may be effective, although it presents more complications for family-run businesses.
Become non-resident in the UK
Non-UK residents are not subject to CGT except on disposals of UK land. However, for those considering becoming non-UK resident, they must carefully think through the relevant rules and how they would manage spending significant periods of time outside the UK. It is also worth noting that a Think Tank has called for Labour to match other jurisdictions and apply a CGT exit charge for those relocating overseas.
Do nothing
Finally, some individuals are taking the approach that speculating about changes to tax should not lead them to make decisions which have significant implications. Particularly for those with longer-term plans where they do not want the “tax tail to wag the dog”.
Other methods of crystallising gains have been used in the past, but we consider that many of these historical approaches would fall foul of HMRC’s increasingly stringent anti-avoidance provisions.
Next steps
With so much uncertainty remaining over what the Chancellor may do in respect of CGT, there is no “one size fits all” solution for clients and any decisions taken pre-emptively ahead of the Budget need to be very carefully considered. There is still time – although urgent action is required - ahead of 30 October to take advice on the points raised in this article so if any of them have resonated with you, please contact the Private Client team at Charles Russell Speechlys for further information.
