No pain, no (capital) gain

It now seems inevitable that this week’s General Election will bring with it a change in government, and Labour are coming under increasing pressure to explain how it will raise the money needed to meet its commitments to increase spending on public services and infrastructure.

Having already committed not to increase the rates for big tax revenue earners of income tax, national insurance and VAT (aside from removal of the VAT exemption for private school fees) there is increasing speculation that the shadow chancellor will instead announce a breadth of smaller fundraising measures.

The Labour manifesto is silent on the subject of capital gains tax (CGT), other than some technicalities relating to the taxation of private equity funds. Rises in the rate of CGT have not been explicitly ruled out during subsequent Labour campaigning, however we have been reassured that Labour will retain the CGT exemption applying to main residences.

Let us not forget that proposals to reform CGT are nothing new. In 2020 the then-Chancellor Rishi Sunak commissioned a review of the CGT system by the Office of Tax Simplification. One of the key recommendations of the OTS report was to close the gap between income tax and CGT rates, with the primary aim of reducing complexity. It also suggested that this step should be taken in tandem with a reintroduction of a form of indexation relief – meaning that only “real” growth, above the rate of inflation, would be captured by the CGT system.

Although these proposals were never implemented, the mere existence of the OTS report has led to an implied assumption in the world of financial planning that CGT rates are likely to be higher in the future than they are now – i.e., a standard rate of 20% (24% for residential property), or 10% (18%) for gains that fall within the basic rate income tax band.

One suggestion from the OTS report which has been put into force is a reduction in annual tax-free exemption for CGT. This has been slashed from £12,300 in 2022/23 to just £3,000 in the current tax year. With asset prices on the rise over the last 18 months, this should already have the effect of increasing tax revenue, as well as bringing CGT planning firmly back onto the financial planning agenda.

It is worth noting that although the c.£16.9 billion raised by CGT in 2022/23* only constitutes around 2.1% of the total UK tax revenue, this sum has been steadily increasing each year. We must therefore acknowledge the likelihood that a cash-strapped incoming government would wish to further reinforce this trend.

Even if rates do not rise, we need to seriously consider the possibility of further cuts to allowances and reliefs – in particular Business Asset Disposal relief, which provides a reduced rate of CGT for qualifying business disposals.

From a personal finance perspective, CGT is an unavoidable aspect of long-term investing, particularly once tax-privileged allowances like ISAs and pensions have been utilised. While it’s always important to consider the tax implications of any financial decision, investors should be cautious about selling investments solely to manage tax liabilities, as this might lead to selling at an inopportune time, potentially sacrificing future growth.

When taxation rules change, or are expected to change, Connor Broadley’s financial planners can of course always help to clarify how these might impact your long-term financial future.

* https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/capital-gains-tax/