Among many taxes lined up for potential change in Rachel Reeves' first Budget on October 30 is capital gains tax, or CGT.
An increase in CGT rates is seen as an "easy win" for a chancellor keen to give the impression of improving the public finances, and will potentially "simplify" taxes by aligning CGT rates with income tax but this move would align CGT more closely to income tax rates, which are higher. Politically, such a move would chime with Labour's mission to make the rich pay more tax to help repair Britain’s ailing public services.
What is Capital Gains Tax?
CGT is owed when an individual sells an asset, such as a second home or shares in a company, and where that sale results in a profit or "gain." You pay tax on the difference between what you paid for an asset and what you sell it for — minus "allowable expenses" such as house repairs, the rules around which are complex and subject to change.
What Are the Current Allowances and Rates?
Individuals are given an annual allowance of £3,000 — down from £12,300 since 2020 — so there's not a huge amount to play with before CGT becomes liable. You then pay the tax on any profits above that amount in that tax year. The allowance resets annually on April 6 when the new tax year begins.
Current Rates (basic rate taxpayer)
• 10% on gains on assets (eg shares), 18% on residential property
Current Rates (higher rate taxpayer)
• 24% on residential property gains
• 20% on gains from other chargeable assets
• 28% on gains from "carried interest" if you manage an investment fund
(There are different allowances for trustees and those with non-domiciled status).
A Working Example
How much you tax pay depends on your income tax band: basic rate taxpayers pay 10% CGT on profits made above the allowance. For example if you make a £20,000 profit on an asset sale you would pay 10% CGT on £17,000, a total of £1,700. The rate is higher on residential property: at 18% on residential property. Anyone earning more than £50,000 a year (which would make them a higher rate taxpayer) pays 20% and 24%, respectively.
You may have noticed that while a higher rate taxpayer pays tax of 40% on their income or in inheritance tax, they pay "only" 20% when they are selling an investment. Aligning the two would simplify tax returns, but cost people more money.
Is CGT Just for Rich People?
It's a common misconception that CGT and inheritance tax are only paid by "wealthy" people. Why? Because, as assets inflate and tax allowances stay the same or even shrink, more people get caught in this tax trap. This isn't accidental; governments call it "fiscal drag," and it's less controversial or obvious than just putting up taxes, which Rachel Reeves has pledged not to do.
What do I Pay CGT On?
CGT is paid on conventional assets such as investment properties and shares held outside an ISA, but you also have to pay CGT on profit made on personal possessions.
The HMRC website cites jewellery, paintings, antiques, coins and stamps as examples of assets liable to CGT charges. Collectors of books could even be caught up in CGT: for example, if you're lucky enough to own a Harry Potter first edition (or a whole set of them), you could be caught in the net if you sell the sought-after bestseller. Bitcoin and other cryptocurrencies face CGT in the UK too, which has caught many people out.
Why is a CGT Increase Happening Now?
There is the immediate Labour politics of fixing the "black hole" in the public finances, but there's more to it than that. Ministers have discussed changes for years. The Office of Tax Simplication — killed off by Kwasi Kwarteng in 2022 after 12 years — published a report into it, claiming the government could raise £14 billion a year by more closely aligning rates.
"The disparity in rates between capital gains tax and income tax can distort business and family decision-making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains," its 2020 report said.
Translation: wealthier taxpayers can game the system, increasing what seems like capital gains and reducing what seems like income.
How Much Does CGT Raise Each Year?
In the last tax year for which figures are available, 2022-2023, HM Revenue & Customs raised more than £14 billion from 360,000 people. That's up from £8.2 billion of CGT on £56 billion of gains in the 2018/19 tax year. Little wonder Reeves is interested.
What's Exempt from CGT?
Investments held within an ISA, some venture capital trusts, shares held in Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes, government bonds (gilts) and some corporate bonds are all exempt from CGT — at the moment.
One of the benefits of owning funds and stocks in an ISA is that, when you sell, you don't have to pay any CGT. Over a lifetime of ISA saving, this could save you a substantial sum – for example, when you need to raise costs for social care later in life.
Private cars and wine that can be stored for 50 years are also exempt, which explains the buoyant market in classic cars and posh plonk. But advisers warn that some of these exemptions could be removed in subsequent changes.
What if I Inherit Valuable Assets?
The value of assets is set at death rather than what the person bequeathing you the asset paid for it. If your late uncle paid £10,000 for a painting he leaves for you in his will, and that's now worth £100,000, the CGT clock starts at death. If you then sell it down the line for £200,000 — cue big gasps from the Antiques Roadshow crowd — then your CGT exposure would be the difference between the £100,000 and the £200,000.
Peter Chadborn, director at advice firm Plan Money, thinks a change to this exemption is very unlikely because it would be seen as a double tax on beneficiaries (who are already paying inheritance tax). That would also increase paperwork for trustees.
How Will the Taxman Know I Owe CGT?
If you file tax returns as part of self-assessment, there's a section about capital gains you need to fill in. Property and share transactions leave a digital paper trail that solicitors and accountants are obliged to share with HMRC.
Do I Pay CGT When I Sell My Main Home?
No, although there's a tiny possibility that this could change at some point in the future. Some people have suggested this could be one way to address the generational gap in housing wealth. This is because it would hit those who've held on to their houses for the longest with big tax bills rather than those trying to make their way up the property ladder - but it's a guaranteed vote loser in Middle England. It's hard to overstate how unpopular this policy would be, even though it might make sense to Treasury mandarins.
How Do I Minimise my CGT Liability?
Each individual has a CGT allowance so spouses/civil partners can transfer assets if they’ve maxed out their allowance for the year. There are certain rules about gifting assets that an adviser can help you with. Using ISA allowances, which are still £20,000 per adult and £9,000 per child, seem an obvious way of taking care of the investment side of CGT exposure.
One aspect of CGT that advisers point to is that, unlike IHT, stamp duty or income tax, it's a "voluntary" levy. Asset-rich individuals with capital gains can avoid selling assets to avoid triggering a big tax bill. That is likely to increase as a practice if the rules change.
How Would a CGT Change be Timed?
A well-flagged policy like this could also trigger pre-emptive action from those worried about a tax grab next year, undermining the government's attempts to raise funds.
Gary Smith, financial planning partner at wealth management firm Evelyn Partners, wrote in a note:
"CGT has featured in a lot of speculation but it's unlikely that a change to the rate would be announced in October, to come in next April, as that would spark an exit from assets in the intervening periods as investors rushed to bring forward disposals to take advantage of the current rate," he says.
In a blogpost, adviser Philip Hanley wrote in August about about the inevitable questions he gets from clients about selling before the Budget.
"I've always said you can only plan, financially and otherwise, on the basis of what you know. Time and again it's been proven that if you try to second guess both markets and budgets, your chances of being right are odds on at best."
Help! I'm Confused by CGT
CGT is complex and allowances are less generous than they used to be.
If you can't tell your chattels from your clogged assets, it's worth seeing a financial adviser or accountant to help you. There are multiple rules about what’s an allowable expense and on carrying forward capital losses from previous years, and these too could be tweaked under the chancellor's proposals. There are tax rules connected with the EIS too, which need to be borne in mind.
This is an updated version of an article first published in 2020
