With only a couple of weeks left to the Budget, Labour's first since March 2010, the rumour mill is well and truly rolling. In addition to speculation over employers' National Insurance Contributions and the changes to the non-dom regime, it has been widely reported that the Chancellor is considering an increase in capital gains tax (CGT) rates in an effort to plug the now infamous '£22 billion black hole' in the public finances. The Chancellor this week also gave a further warning that the UK faces a £100 billion public finances blackhole over the next five years. Will increasing the CGT rates help?
Based on Labour's manifesto pledges, which ruled out increases to income tax, national insurance and VAT, CGT is one of the few remaining levers available to the Government. Rumours emerged last week that the Treasury is modelling potential CGT rises to between 33% to 39% (the top rate is currently 28%). This speculation has triggered concern amongst individuals braced for the potential financial impacts. At the International Investors Summit in London this week, Prime Minister Sir Keir Starmer added that speculation on CGT rises was getting "wide of the mark". He refused to be drawn any further on the contents of the upcoming Budget stating that "until Budget day, none of it is going to be revealed".
The focus on CGT rises has intensified following doubts that the proposed reforms to the non-dom status in the UK will raise any revenue, well wide of the initial £1 billion per year targeted.
Pre-Budget panic: engineered by the rumour mill?
According to an FT survey, CGT was the tax rise its readers "most feared" on Budget day.
Due to information not being provided by the Government and the fact that the lead time between July's General Election and this month's Budget has enabled a long corridor for speculation, investors are reportedly planning for a "worst-case scenario". As a result, many business owners and individuals are hurrying to make disposals of their assets pregnant with gains to trigger charges ahead of the Budget to take advantage of the current (expectedly) lower rate.
The flipside to this, further rumours suggest, is that the Government's reticence to address any of the speculation ahead of Budget day could be a tactic to encourage a surge in revenue-generating transactions amidst the uncertainty, which is thought will tail off after Budget day.
How many people pay CGT anyway?
The latest data from HMRC on CGT receipts provides that in 2022/23 369,000 taxpayers triggered a total CGT liability of £14.4 billion on £80.6 billion of gains. Of this, nearly £6 billion, or 41%, was solely attributable to taxpayers who made gains of £5 million or more – a pool of people making up just 1% of the total CGT taxpayers.
Given so few people in the UK are subject to CGT, changing the rates to align them with income tax may not be as fruitful as hoped for the Treasury. It is certainly not going to fill the £22 billion blackhole.
Further, increased rates of tax do not necessarily mean more tax coming in, as people are likely to change their behaviours. For example, in the UK, there is no CGT on death – assets owned are (under current rules) up-based to market value. Increasing CGT rates could mean that people delay transferring their assets to take advantage of the uplift. If someone is non-UK resident, and remains so for five tax years, there will also be no CGT on the disposal of assets. This may mean that people decide to leave the UK in order to sell. Whilst this is an option with considerable personal upheaval, many people, including UK entrepreneurs, are taking advice on it now.
What can we expect on Budget day?
A change to CGT is likely given the manifesto pledges. However, whether that will be increased rates or changes to reliefs or allowances is as yet unknown. We look forward to 30 October when we will get clarity. At that point, we will be able to assess the Chancellor's announcements and any draft legislation to advise our clients. In the meantime, speak to your usual Mishcon de Reya contact to discuss any current options that may be available.