With the announcement of a £22bn black hole in public finances, combined with the commitment to not increase certain taxes, it is no surprise that capital gains tax (CGT) is the subject of speculation. CGT is a tax on the profit arising from the disposal of an asset, for instance when a business owner sells their shares in a business, the gain on these shares is usually subject to CGT.
In the latest published stats by the Institute of Fiscal Studies (IFS), CGT currently raises around £15 billion per year, less than 2% of total tax revenues and CGT is paid by less than 1% of taxpayers. We can see that it is heavily concentrated towards the top bracket of income distribution and that CGT tax rates are lower than that of income tax rates.
However, it may not be as simple as just raising rates. The government should not discourage saving, investment and risk taking. For example, entrepreneurs taking risks to launch new companies which have also created jobs and contributed to the economy, would not look favourably upon an increased level of CGT to pay upon exit. As mentioned in the IFS Capital Gains Tax Reform Paper, the design of CGT should not distort commercial decisions about who holds assets for how long, which assets are chosen and whether remuneration is taken as earnings, dividends, or capital gains.
Some likely scenarios
Broadly, the current rate of CGT for a higher rate taxpayer is 20%. One potential scenario would be bringing the rate in line with higher rate Income Tax and increase to 45%. An alignment of CGT with Income Tax could mean that business owners pay 25% more tax on the sale of shares in a business. To illustrate this, the sale of shares in a business for £10m would attract £2.5m additional tax for the business owner.
Another scenario could be abolishing the Business Asset Disposal Relief (BADR), previously known as “Entrepreneurs Relief.” This currently enables a lower rate of CGT of 10% to be applied to the first £1m of lifetime gains when selling shares in a qualifying business. This is particularly controversial considering the £1m rate was reduced from £10m in 2020. Based on the above example of a £10million sale if BADR is abolished this would also remove £100k of relief currently available to qualifying shareholders.
If you have business assets to sell or pass on, then it is likely the upcoming budget announcement will affect you in some way. However, the Government will not want to undermine its commitment of economic growth and dampening entrepreneurship. Of course, the Government may seek to protect the business owner, only time will tell.
Raising CGT will mean investors and business owners seek investment vehicles which shelter against the tax, such as Enterprise Investment Scheme and Venture Capital Trusts. EIS offers a CGT deferral option and both EIS and VCTs offer CGT free growth. Both schemes have been extended for a further ten years to April 2025, which passed through Parliament as part of the Finance Act 2024.
Please note tax benefits depend on the individual circumstances of each investor and may be subject to change in the future.