Whilst no-one can know exactly what will be in Chancellor Rachel Reeve’s first Budget on 30th October, one area where she is almost certain to focus – given that she has already declared that she has a £22 billion ‘black hole’ in the public finances to plug – will be capital taxes.
Labour’s election manifesto did not mention capital taxes, but its declared intention to ‘close the tax gap’, along with Keir Starmer’s refusal to rule out increasing capital gains tax (CGT) if he were elected, both point to this being at, or very near, the top of the new government’s priorities when it comes to raising extra revenue.
Research published by the London School of Economics shows that over a ten year period, just 3% of adults pay any CGT at all, and strikingly, more than half of all the CGT paid in 2020 (52.2%) was paid by just 5,000 individuals.
So what measures could Mrs Reeves take to increase capital tax receipts?
The most obvious one will be to raise the rate of CGT. Currently capital gains are taxed (after allowances) at 20%, with a higher rate of 24% for gains made on properties which are not the taxpayer’s principal residence. Given that the vast majority of those who pay capital gains tax are higher or additional rate taxpayers, this means that their rate of capital taxation is considerably lower than if that income was earned.
There have been calls in the past for individuals to pay CGT at their marginal income tax rate. Others have lobbied for a flat rate of 40%, reflecting the income tax rate paid by the majority of those who enjoy capital gains.
We just don’t know what the Chancellor will do, but my best guess is that any increase in CGT rates will be stepped, with an initial rate of, say, 30%, with a promise to increase this still further in future Budgets. She might keep a lower CGT rate of 20% for basic rate income taxpayers.
Another area which could be vulnerable is Business Asset Disposal Relief, formerly called Entrepreneurs’ Relief, which allows eligible gains of up to £1 million to be taxed at 10%. This is a relief which mostly benefits small business owners, so it would be a shame to see it taken away.
The timing of all of this will be crucial. On the one hand, allowing a window before increased capital tax rates come into force would probably see a rush of deals, providing a short-term tax revenue gain for the Exchequer, something which would be very handy. But will the Chancellor be happy to see potential higher tax revenue lost, or will she introduce any new rates immediately, at midnight on Budget Day itself?
With formal commitments already made to leave income tax rates alone and a longstanding aim to tax higher rate earners more, this area should be considered by all affected immediately. So whilst we don’t know the detail, it is a fair bet that increases in Capital Gains Tax will feature front and centre on 30th October. Join us at our post budget events.