Autumn Budget: how Labour might change CGT

The Labour government has promised not to raise Income Tax, National Insurance or VAT. This has inevitably led to a guessing game over which other taxes might be hiked in next week's Autumn Budget (30 October), to plug what the Chancellor, Rachel Reeves, described as a '£22bn black hole' in the nation’s finances.

One prime target in the Chancellor’s crosshairs is Capital Gains Tax (CGT) — levied on gains made when selling shares, second properties and selected other assets.

It is widely expected that Reeves will raise the headline rate at which CGT is charged. This is currently levied at a maximum of 24%, significantly below income taxes for higher earners - and below comparable taxes charged in many other G7 nations.

It's clear that many investors are worried about a forthcoming hike, with some realising gains now to avoid a potentially higher tax charge post-Budget. This is one of the reasons given by tax experts for the 16.3% increase in tax receipts, seen in the three months from July to September, as Budget speculation started to mount.

However the Prime Minister Keir Starmer described reports that CGT could be ratcheted up to 39% - bringing it closer to higher rate income tax - as being "wide of the mark". But he did not take the opportunity to rule out any increase to headline CGT rates.

Overall CGT generated £14.4bn in revenue for the Treasury in the 2022/23 tax year. However, figures for that year show that only 369,000 people paid this tax — a relatively small proportion of the population — although a figure that has doubled over the past decade.

Raising the CGT rate is likely to maximise revenues from this tax. Reeves could also alter the rules around when CGT becomes payable and on what assets - although there may be less room for manoeuvre here, particularly as the main CGT threshold has already been whittled away by previous Conservative governments.

How does capital gains tax work?

This is a tax on the profits made when selling certain assets. These include shares or investment funds that are outside an ISA or pension, personal possessions (excluding cars) worth more than £6,000, and any property that is not your main home. CGT is also paid by businesses when selling assets.

This tax isn’t charged on the sale value of these items, but on the profits made. So when calculating your CGT liability, you need to know the price at which you bought or acquired the asset, and the current market price on the day you are disposing of it. Generally, this will be the price you sell it for, but if you are giving away assets to relatives, this transfer may still be potentially liable to CGT.

The sale of some assets, such as cars and the family home, are not subject to CGT. This tax is also not applied on the transfer of assets between married couples and civil partners, nor on assets bequeathed after your death — although Inheritance Tax might apply here instead.

CGT thresholds and rates

Everyone has an annual CGT allowance, with this tax only charged on gains above this amount. This threshold currently stands at just £3,000 — having been significantly cut in recent years. Just two years ago, CGT was only charged on gains over £12,300.

This annual allowance is more useful for those selling assets like shares, where disposals can be made over a number of years, up to this threshold, to reduce CGT liability. It is less useful for those selling a large single asset, like a second home, where there is no flexibility to sell a ‘portion’ of the property.

So if you have made profits of more than £3,000 on one of these relevant assets, you’ll be charged CGT on the gains over this threshold.

However, when it comes to the tax rate you’ll pay the picture gets even more complicated — as the exact rate depends on both your marginal tax rate, and the asset you are disposing of.

For higher or additional rate taxpayers, CGT is charged at 24% on residential property and 20% on other assets. For basic rate taxpayers this reduces to 18% on residential property and 10% on other assets.

There is, however, a catch. If you are a basic rate taxpayer, the profit you’ve made from this sale (minus the £3,000 CGT allowance) is added to your other taxable income for that year. If this pushes you into the higher rate tax band (currently £50,271), then you pay the higher CGT rates.

Potential changes to CGT

There is an argument for simplifying CGT. This could be done in a way that reduces the overall tax take — or in a way that raises more money for the Exchequer. Given the economic circumstances it seems inconceivable Reeves won't go for the latter option.

Having a single CGT rate would significantly reduce complexity — but would also raise more revenue if set at the current rate for higher rate taxpayers or the property rather than 'other assets' rate.

The Chancellor may also be tempted to remove some of the CGT exclusions. Removing the CGT exemption for spouses, for example, has the potential to raise significant revenue, as this is often used in family tax-planning arrangements, although there has been little speculation that Reeves is considering this.

Likewise, Reeves could further reduce the annual CGT allowance, or abolish it completely, given it has been cut to the bone in recent years. This would be a relatively small change and wouldn’t require an extensive rewrite of tax rules.

Politically, this might be appealing, as it allows Labour to raise additional funds, while keeping the CGT rate the same, potentially allowing them to say they are sticking to manifesto pledges not to raise taxes.

Can you protect yourself from CGT changes?

It is never a good idea to make significant changes to your investments based on Budget speculation. This rarely equates to sound financial planning. However, it is always worth reviewing your finances on a regular basis to ensure you are making the most of all tax allowances. This includes sheltering savings and investments in tax-free wrappers such as ISAs and pensions.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA or SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.