Capital gains tax: what will be the effects of the new rates?

Before the autumn budget, some commentators were calling for parity between capital gains tax (CGT) and income tax rates, claiming it was unfair that unearned income should be taxed at a lower rate than earned income. 

The chancellor did not heed these calls, perhaps because of the risk that increasing CGT might discourage investment. Also a big rise might deter the buying and selling of assets, thus decreasing liquidity in the economy, and if rates were put up so they were equal to income tax that would not recognise the risk that people are taking with their money when they invest.

Nonetheless, CGT did go up with immediate effect in the 30 October budget but not for the sale of property. Before looking at the changes brought in by Rachel Reeves, it is worth reminding ourselves of what CGT is and which assets it is payable on. 

It is a tax on the increase in value of an asset between being bought and being sold. If the value of an asset has stayed the same or gone down it is not payable, no matter how large a sum the asset is sold for.It does not apply to earned income, interest payments and dividends. Typical assets that CGT is payable on are: 

• Business assets, eg, the sale of a company;
• Valuable personal belongings, such as jewellery, paintings or fine furniture;
• Properties that the seller does not live in;
• Sales of shares not held in an ISA;
• Cryptocurrencies.

It is not payable on private vehicles, as HMRC considers these to be depreciating assets, even though a minority of cars, typically low-volume, high-performance models from prestige marques, can appreciate in value. CGT does apply to commercial vehicles, such as taxis, lorries and vans, as well as to scooters, motorbikes and racing cars.

It is not only sales of assets that attract CGT. Gifting an asset or swapping it for another one also does, as do insurance payments for the loss of an asset that has gone up in value.

What changed in the budget?

The new CGT rates introduced in the budget are 18% for basic rate taxpayers (up from 10%) and 24% for higher rate taxpayers (up from 20%).The tax on carried interest, which is investors’ profits on exiting investments, remained at 18% and 28% for now but will increase to 32% for both basic and higher taxpayers at the start of the new tax year.

The rates for gains on sales of residential properties not inhabited by the seller remained at 18% and 24% depending on which tax bracket the seller is in. Thus the rates on property assets and non-property assets are now the same.

Relief is available for a property that the seller lived in before letting it out for the years that he or she lived in it, and also for the last nine months before the sale. No CGT is payable on a gain from the sale of a main home.

Business assets

Business asset disposal relief reduces the tax paid on the sale of businesses and business assets. From 6 April 2025 the rate payable will go up from 10% to 14% and from 6 April 2026 it will go up to 18%, matching the rate paid by standard rate taxpayers.

Exemptions and allowances 

Everyone has an allowance of £3,000 a year (the annual exempt amount or AEA) so no CGT is payable on gains on asset sales beneath this figure. This has been falling sharply: in 2023-24 the allowance was £6,000 and in 2022-23 it was £12,300. 

Gifts between spouses and civil partners remain exempt; however, different rules are in effect for divorcing or separating couples. In addition, gifts to charities are exempt for CGT. 

One little-known exemption is on gains from sales of bullion coins from the Royal Mint. While gains on the sale of gold will be liable for CGT in the normal way, bullion coins are classed as British legal tender and are therefore not taxable.

Other CGT tax-free investments are government bonds (gilts)and VCTs (venture capital trusts). 

Minimising liability

CGT liability can be reduced by giving an asset to a civil partner or spouse so that two allowances can be applied to the capital gain.The transfer must be unconditional and outright to be eligible.

Another way of reducing liability is to stagger the sale of assets. For, example, if half a share portfolio was liquidated before 6 April in any given year and the other half afterwards, it would benefit from two tax-free allowances.

Costs incurred on the sale of an asset can be used to reduce CGT rates so on a property transfer legal and estate agents’ fees can be deducted from the gain on the sale of the property. Sellers can  also set off the cost of home improvements and extensions (but not maintenance).

Assets sold at a loss can be set off against any capital gains, whether in the current tax year or future ones. The loss must be registered with HMRC within four years of the end of the tax year in which the loss was made. This is a slightly more complex area so advice should be sought on how to do this correctly.

Investing in an ISA or pension will shelter those assets from CGT. Assets can be transferred into unused ISA allowances, making gains on those assets tax free.

CGT and retirement

Individuals may end up with lower growth on investment portfolios as they reduce trading to avoid paying the increased tax rates on gains. Many people will be making investments to provide a retirement income,which will inevitably be reduced both by the higher tax rates and by the greater disincentive to make reallocations and adjustments to portfolios,particularly if they involve assets that have been held for a long time.

What will be the effect on tax revenues?

It is too early to say how much – if any – extra tax HMRC will collect as a result of the increases to CGT rates. It is conceivable that the Treasury’s tax take could even go down as investors sit on assets rather than sell them. In any case only about 350,000 people pay CGT in any given year, which limits the scope of how much the tax take could rise by.

A Treasury forecast estimated that if CGT went up by 10 percentage points then revenues would deteriorate by £400 million in 2025-26,£985 million in 2026-27 and £2.25 billion in 2027-28 due to asset sales not made by investors to avoid paying the higher tax rates. As well as reducing the tax take the higher rates would decrease the flow of capital into the economy, putting a drag on economic growth.

This probably accounts for the middle way approach taken by Ms Reeves in bringing in some increases to CGT rates but keeping them below income tax levels. It remains to be seen if she will be coming back for more,further closing the gap with income tax rates.

If you would like help and advice on any capital gains tax issue please call Finsbury Robinson on 020 8858 4303 or email us at info@finsburyrobinson.co.uk. Our team of experts will ensure you pay the right amount of tax – and no more.

[ENDS Angus Walker 06.01.25]