Get ready for tax changes as new Chancellor balances Britain’s books
The new Chancellor Rachel Reeves has been poring over Britain’s finances and is expected to announce some changes to the tax system to help plug a £20bn shortfall on the balance sheet. She will deliver her first Budget on 30 October and may have capital gains tax (CGT) and inheritance tax (IHT) in her sights.
One option she is reportedly considering is raising CGT rates to match income tax rates.
This is how the two tax regimes currently look:
Income tax
| Basic rate taxpayer |
20% |
| Higher rate taxpayer |
40% |
| Additional rate taxpayer |
45% |
Capital gains tax
| Shares |
|
Second residential property |
|
| Basic rate taxpayer |
10% |
Basic rate taxpayer |
18% |
| Higher rate taxpayer |
20% |
Higher rate taxpayer |
24% |
| Additional rate taxpayer |
20% |
Additional rate taxpayer |
24% |
Equalising CGT and income tax would represent a significantly increased tax burden for those liable for CGT. CGT is a tax on profits, so you only pay it when you sell assets such as investments or property. The CGT allowance has been steadily reduced from £12,300 in the 2022/23 tax year, to £6,000, and finally to £3,000 for the current tax year.
CGT receipts totalled £14.4bn in the 2022/23 tax year, with almost 370,000 people paying the tax – more than double the number who paid it a decade ago. The Office for Budget Responsibility predicts CGT will raise £15.2bn in 2024-25.[i] The government’s own figures show that increasing CGT too much can reduce the amount it generates for the public purse because investors change their behaviour.[ii] People will choose to sit on their hands and avoid selling their shares or second properties to avoid being hit with a bill.
Sell or hold fire?
Sometimes selling your assets and paying CGT will be the right thing to do, but at other times it won’t. Where selling your existing investments would create a significant capital gains tax liability, it may not always be appropriate. Better investment performance from any new preferred or replacement holding is not guaranteed and you can’t be sure that your portfolio returns will outweigh your CGT bill. Speak to an investment professional who can advise on the best strategy for you.
Using your annual ISA allowance is a good way to shield your gains from CGT, but if you have maxed out your £20,000 allowance, you could consider other options. Multi-asset funds, for example, offer a way to invest tax-efficiently within the fund and allow greater tax planning flexibility because any gains are ‘rolled up’ within the fund as underlying assets are bought and sold, meaning capital gains tax is not due until the actual fund units are sold which can be timed to best suit your situation.
Changes to inheritance tax?
Another option the Chancellor may be considering is increasing inheritance tax (IHT) rates or reducing the thresholds at which it is payable. At 40%, IHT is one of the highest tax rates in the UK and certainly one of the most hated taxes.
As ever, our financial planners and portfolios managers will be keeping a close eye on any developments. If you would like to seek advice on the best course of action for your money, please get in touch.
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