Labour: capital gains tax – potential increases and options for the new government

With Labour, capital gains tax increases were not ruled out ahead of the election. With the formation of a new government, they will face tough decisions regarding taxation and spending. So, will capital gains taxes increase?

In both their election campaigns, Labour and the Conservatives committed to not making changes to income tax, national insurance, VAT, and corporation tax. (Labour stated that these would not increase for working people).

Despite modest spending commitments from both parties, additional revenue from other sources appear to be necessary. This is because of tight spending plans already in place.

Assuming Labour adheres to existing fiscal rules and chooses not to increase borrowing. It is worth considering what revenue-raising measures the new government could implement in the next budget. (Which is likely to occur in mid to late September 2024, at the earliest).

Future tax increases

Labour has already announced plans to impose VAT on private school fees and raise taxes on North Sea oil. These measures are small in the context of total government spending.

Speculation has arisen over what other measures Rachel Reeves, the Chancellor of the Exchequer, might consider. The focus here is on potential changes to capital gains tax as there has been no commitment from labour not to raise this tax. Labour has already confirmed that it will close the loophole where performance-related pay in the private equity industry is taxed as CGT, rather than income tax. The manifesto of the Labour Party states that this would raise £565m each year for the Treasury.

The FT has reported that some wealthy individuals are selling assets in anticipation of a Labour government increasing CGT. With some even considering leaving the UK. It went on to explain that comments from wealth managers indicate that some affluent individuals are already selling assets. This is over fears the newly formed government will increase capital gains tax.

The International Monetary Fund recently suggested broadening the scope of CGT. However it would require a bold chancellor to eliminate the largest exemption to CGT – gains from the sale of a primary residence. Even though such a move could generate £25 bn annually. Whilst not specifically in the Labour Manifesto, it has been publicly confirmed by Labour that they would not change this.

What are the current capital gains tax rates?

Capital gains tax was first introduced by Labour’s Jim Callaghan in 1965. It is a tax imposed on the disposal of certain assets (currently) valued at £3,000 or more. Such as buy-to-let property, second homes, shares not held in an ISA, crypto and business assets. 

Despite Capital Gains Tax generating £15 bn for the Treasury in the 2023/24 tax year and an expected £19.5 bn in the 2024/25 tax year, CGT is taxed at a lower rate compared to income tax, making it an attractive option for the Treasury.

Today, Basic rate taxpayers pay 10% on capital gains or 18% on residential property and carried interest. For higher and additional rate taxpayers, and where the gain takes a person into a higher tax band, the rates increase to 24% on residential property gains, 28% on carried interest gains, and 20% on other chargeable assets.

How could Labour increase capital gains tax?

One of the most straightforward actions to take would be to align the CGT rates with income tax rates. This is a proposal Ms. Reeves herself advocated for in a pamphlet released in 2018.

According to some sources, this adjustment could potentially raise between £8-£16 bn for the Treasury. This was previously implemented by Conservative Chancellor Nigel Lawson, in his March 1988 Budget.

The change resulted in significant revenue and was maintained until 2007. At this point, Labours Chancellor, Alistair Darling reintroduced a new flat rate of CGT. This was 18%, significantly lower than the prevailing income tax rates at the time.

Current reporting requirements for capital gains tax

How you report and pay capital gains tax has been changed in recent years. It is now a requirement to report and pay any taxable gains on the disposal of residential property within 60 days of the completion of a sale. A previous 30-day obligation came into effect on 6 April 2020.

You can read more about this in our article ‘Capital Gains Tax on Property – the 60-day rule for residential property’.

Other capital gains are declared and paid through a self assessment tax return. This was also the case with residential property, prior to April 2020

The former Office of Tax Simplification recommendations to increase capital gains tax

Proposed increases to capital gains tax are not a new idea. The now-abolished, Office of Tax Simplification, an independent office of HM Treasury made recommendations to the government. This was in two reports, published in 2020 and 2021 (read more on this here).

Some of these recommendations included:

    • Aligning Capital Gains Tax with Income Tax
    • Significantly reducing the annual level of Capital Gains Tax exemption (potentially to between £2,000 and £4,000)
    • Reducing the scope where employees benefit from Capital Gains through shares received from their company

At the time of the report, the annual exemption amount was £12,300. Subsequently, this was reduced to £6,000 and then again to the current rate of £3,000.

Labour capital gains tax – equalising this with income tax

There are arguments both for and against equalising CGT and income tax rates.

Supporters of raising CGT argue that it is unfair for individuals profiting from the sale of assets to be taxed less than those earning income through work.

On the other hand, opponents argue that it discourages entrepreneurship and innovation. This is because entrepreneurs who take risks in starting businesses should be incentivised rather than penalised.

Additionally, CGT has historically been set lower than income tax due to the impact of inflation on capital gains. Chancellors have attempted to address this issue over the years. Measures such as indexation allowances and taper relief being introduced. This was to ensure individuals were taxed on their real capital gains rather than inflationary gains.

The potential risks of a labour capital gains tax increase

Increasing the CGT rate could result in a decrease in tax revenue. Currently, the majority of CGT is derived from the sale of business assets. CGT here and can be avoided by not selling an asset.

Wealthy individuals can avoid CGT by holding onto an asset until they die, as it is not chargeable on death. They can also borrow against the asset if they need to raise capital during their lifetime.

Equalising CGT and income tax may not be effective today. The top rate of income tax is already at 45 pence in the pound. Raising CGT to this level would make the UK’s rate the highest in Europe. And this could lead to a brain drain.

The average CGT rate for countries in Europe rising out of the sale of listed shares is estimated to be 17.9%. The UK sits in the middle of the table, whilst seven countries currently have rates at 30% or above.

The UK is heavily reliant on a small number of taxpayers. Just 100,000 individuals pay a quarter of all income tax and CGT. This data is from a FOI request to HMRC. These individuals represent a mere 0.3% of the total number of taxpayers. They have carried an average income and CGT bill of £559,000 each in 2021/22 Tax year.

Many of these taxpayers are highly mobile and may leave the UK if the tax burden becomes too high. Which is not something a chancellor looking to encourage entrepreneurship and investment would want.

Capital gains tax and its relation to the residential property market

In the 2024 Budget in March 2024, Chancellor Jeremy Hunt reduced the higher rate of capital gains tax for property disposals. This was subsequently reduced from 28% to 24%.

This was announced to incentivise earlier disposals of second homes, buy-to-let property and other residential property where accrued gains do not fully benefit from private residence relief. The government claimed this would generate more transactions in the property market. This, in turn, could benefit those looking to get onto the property ladder or move home.

From HMRC data, there are an estimated circa 2.82 million private landlords in the UK. Additionally, more than two-thirds are over the age of 55. In 2023, The average landlord portfolio was valued at £1.65 million.

For many buy-to-let landlords, a limited company structure may be more attractive. You can read more on this in our article ‘Buy to let limited company – should you set one up?

Whilst residential property has a different capital gains tax rate of other assets, changes here could subsequently influence the property market. Increases could make property disposals less attractive, leading to supply and demand issues on the market.

How Alexander & Co can help

At Alexander & Co, all our tax accountants are fully qualified. We provide expert advice to help minimise tax liability and additionally, keep you on the right side of HMRC.  

In addition to advising on Capital Gains Tax, we provide a comprehensive range of tax and accountancy services to both businesses and individuals. services include:

  • Trust advice
  • Company reorganisations, sales, mergers and aquisitions
  • Buy-to-let accountancy and tax services for landlords and developers
  • Advice on a limited company structures for property investment
  • Stamp Duty Land Tax (SDLT) advice
  • Inheritance Tax planning and mitigation advice

To discuss how we can assist you further, please contact us. You can either email info@alexander.co.uk or fill out the form below.

Further Reading

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Non-resident tax – a useful summary of tax treatments

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Filing Self Assessment tax returns early – the benefits for cashflow and business planning

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