It’s no secret that new Chancellor of the Exchequer Rachel Reeves has some tough decisions to make as she approaches her first Budget in post. She wasted no time priming the country for pain ahead when she announced that Labour had inherited a £22bn black hole in public finances from the previous government.
The majority of analysts accept that such a deficit cannot be made up through a return to austerity measures alone. Rises in taxation are inevitable, despite the tax burden already being at a 70-year high.
But with Keir Starmer’s government already ruling out hikes in income tax, national insurance and VAT as it tries to shield ‘working people’ from further cost of living increases, speculation has turned to what tax levers Ms Reeves might look to pull instead.
A strong ante-post favourite is Capital Gains Tax (CGT). CGT is paid on any profit made from selling or otherwise disposing of a long list of assets, including personal possessions with a value of £6,000 or more (excluding primary vehicles), property that isn’t your main residence, company shares and certain classes of business assets.
The regime for what you pay on which assets is complex, with variable rates depending on the Income Tax band you fall into, plus different rates for money made from residential property versus other chargeable assets. There is also a long list of exemptions, plus a £3,000 a year personal allowance before CGT is payable.
This makes predicting exactly how the Treasury might look to increase receipts from CGT tricky. The broad-brush options are to increase one or all of the rates, or cut the personal allowance – although the fact that this has already been slashed from £12,300 prior to April 2023 means there’s limited room to make a significant difference to Treasury coffers via this route.
The impact of aligning CGT rates with Income Tax
One of the most persistent rumours doing the round is that the Chancellor will look to align some or all CGT rates with Income Tax rates. As per analysis from the Resolution Foundation, the fact that CGT hasn’t kept pace with Income Tax amounts to ‘passive’ income from existing wealth like shares and property investments being more lucrative than ‘earned’ income. And as the wealthiest have more capital, it has contributed to a widening of the gap between rich and poor.
This would certainly fit with the Labour government’s stated intention to protect ‘working people’ from tax increases. So what could the impact of bringing CGT in line with Income Tax be, and who would it affect the most?
The Resolution Foundation again points out that one of the most glaring inequalities is the fact that CGT is paid at the top rate of 20% on share disposals by high earners (or 28% on the carried interest earned on the share of profits by investment fund managers), but Income Tax is paid at the Higher rate of 33.75% on dividends, and 39.35% Additional Rate. The Resolution Foundation suggests that even with the reintroduction of inflation indexing to CGT to mean it was only paid on real-terms gains, bringing rates into line with dividend Income Tax rates could earn the Treasury £7.5bn a year.
This would not only hit large shareholders hard, it would also represent a huge grab from the whole venture capital sector, which uses carried interest as the basis of performance-related fees for fund managers. As practically all fund managers would fall into the Additional Income Tax bracket, they would in effect see their tax liabilities leap by 11.35%.
Landlords are another group who will be awaiting the Budget with a certain degree of concern. At present, CGT on disposals of residential property is charged at a basic rate of 18% and a higher rate of 24%. Aligning those rates with Income Tax would see rates increase to 20% and 40% respectively. That would mean landlords in the higher bracket paying on average an extra £11,360 per property sold.
Want to get a head start understanding how the Budget will affect you and your business? Get in touch with our tax planning team.