The new Labour government’s first budget announcement is due to take place on Wednesday 30 October. The government have identified a £20bn hole in the public finances, sparking rumours of an autumn tax raid, despite Keir Starmer’s repeated assurances during his election campaign that a Labour government would not increase taxes for ‘working people’.
These rumours have been strengthened by the Prime Minister’s speech on 27 August, in which he warned that the budget would be ‘painful’ and that those with the ‘broadest shoulders should bear the heavier burden’, which seems to indicate that tax increases should be expected, though perhaps not for all.
Questions have been raised as to whether this £20bn hole was in fact a surprise, or whether it has been created by the new government’s policies, particularly their decision to grant above inflationary pay rises to public sector workers. However the hole got there, it seems clear that the government is committed to raising the funds to cover this shortfall. Having ruled out increasing income tax, VAT and national insurance, the question therefore is which taxes will be raised, when and by how much?
It is impossible to predict at this stage which levers the Chancellor of the Exchequer will opt to pull but it is worth considering which options are available to her.
Capital Gains Tax
The Prime Minister has refused to rule out a Capital Gains Tax (CGT) rate rise, leading to increased speculation that the Chancellor will announce an increase in the Autumn budget. There are a number of ways in which the current CGT regime might be altered:
- Rate increase – The CGT rate is substantially lower than the top rate of income tax (20% versus 45%) and so the government may opt to increase the CGT rate. The delta between the rates is, in some respects, to incentivise taxpayers to put capital at risk and so it would seem unduly punitive to align CGT with income tax, but an increase in the CGT rate may be likely. Although a rate increase could, in principle, increase the revenue generated by the government in many ways CGT is a voluntary tax. An increased rate may result in taxpayers holding onto assets until rates are reduced, diminishing the total CGT tax take, or to dispose of assets whilst no longer a UK tax resident, eliminating the CGT liability altogether.
- Loss of CGT uplift on death – Currently there is a CGT basis step up on death with the executors of an individual’s estate having a base cost in the assets which is equivalent to the market value of the asset on the date of death. Generally, this means that assets are distributed to beneficiaries with little or no CGT being paid as the short period between acquisition and disposal by the executors frequently means that no gain is realised. However, estates are subject to IHT on death and so there is a logic in not subjecting executors to both a 40% IHT liability and a 20% CGT charge. Removal of the CGT uplift on death would mean that the CGT base cost would be the base cost of the deceased and so this would result in many estates being liable to pay CGT. If assets are stood at a significant gain, and IHT is also due on those assets, the effective rate of tax on these assets could be punitively high. For example, if assets were acquired for £100,000 and were worth £1m on death there would be a gain of £900,000. Assuming that the CGT rate remains 20%, that could give rise to a CGT liability of £180,000. In addition, there may be IHT at 40% due on the £1m, giving an IHT charge of £400,000. That would result in an effective rate of tax on those assets of 58%.
- Changes to reliefs – A less drastic change might be to alter some of the CGT reliefs. In particular holdover relief can apply on the gifts of business assets, with no CGT being payable on the gift and the donee acquiring the donor’s base cost in the assets. Alterations to these rules could bring forward the taxable event. It is not clear how widely used this relief is and so the impact of making a change to holdover relief may be fairly limited.
- Indexation – If a CGT rate rise is introduced then it is possible that indexation will be correspondingly introduced. The basic principle of indexation is that a deduction is made in the computation in respect of inflation. In effect, this allows for any fall in the value of the pound over the period of ownership to be taken into account when calculating any chargeable gain. If CGT rates are aligned with income tax rates then our view is that indexation would need to be introduced so as not to subject inflationary gains to tax.
CGT: what should I do now?
- Accelerate gains – One option might be to accelerate gains, by disposing of assets now when the CGT rate is known, either by way of a sale or gift. It is possible that any rate rise announced in the autumn budget could have immediate effect, crystallising gains prior to 30 October 2024 may be effective to bank the current rate.
- Rebasing – It might be possible to re-base certain assets. This would involve restructuring arrangements in such a way that a chargeable gain would be realised without triggering any of the anti-avoidance provisions. We covered rebasing in an article on 21 June 2024 which you can read here.
- Leave the UK – The nuclear option would be to leave the UK permanently and realise gains at a time when you are non-UK tax resident since non-resident individuals are not typically subject to UK CGT other than on gains arising on UK land. However, you would need to be a non-UK tax resident for six complete tax years to ensure that you are not caught by the UK’s complex temporary non-residence rules.
Although one may be anxious to take mitigation steps now, it is worth noting that there is no guarantee that the CGT rate will rise. Over the past few years, we have seen speculation that the CGT rate will be increased, triggering disposals of assets to bank the existing rate (and therefore increase the tax take for the year) only for the rate to stay the same. Any decision taken to trigger chargeable gains prior to the 30 October budget would be a calculated risk based on the assumption that the rate will increase.
It is possible that, even if CGT rates are increased, the government will introduce reliefs for certain categories of asset and/or asset holders. Those reliefs might offer a lower rate of tax in certain circumstances, and they might prescribe a holding period for the asset in order to qualify for the relevant relief. Accelerating CGT now might mean not qualifying for those holding periods.
We help individuals and their businesses with complex international affairs in navigating the changing landscape of UK taxation. Please get in touch if you would like assistance.
For further information, please contact:
Christopher Groves, Partner, Withersworldwide
christopher.groves@withersworldwide.com
