In a move set to impact investors nationwide, the UK government has increased Capital Gains Tax (CGT) rates, effective from October 30, 2024. The basic rate has risen from 10% to 18%, while the higher rate has jumped from 20% to 24%.
This substantial change underscores the need for individuals to reassess their investment strategies promptly.
Immediate Changes to CGT Rates
The October 2024 budget introduced immediate alterations to CGT rates. Basic rate taxpayers, who were previously paying 10%, will now face an 18% tax on capital gains. Higher rate taxpayers will see an increase from 20% to 24%, making asset disposals significantly more expensive.
These adjustments aim to align CGT rates more closely with those applicable to property sales, creating a more equitable tax framework.
Impact on Business Asset Disposal Relief
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs' Relief, has also been affected. From April 6, 2025, the CGT rate under BADR will increase from 10% to 14%, making business asset disposals more costly.
The rate will further rise to 18% from April 6, 2026, matching the standard lower CGT rate. These changes necessitate careful planning for business owners considering the sale of assets.
Reduction in Annual Exempt Amount
The Annual Exempt Amount (AEA), which determines the threshold above which CGT becomes payable, has also been significantly reduced. In the 2022-2023 tax year, the AEA was set at £12,300. However, it has been drastically lowered to £3,000 for the 2024-2025 tax year.
This reduction means that more individuals will be liable for CGT on gains exceeding this new, lower threshold, potentially affecting a wider group of investors.
Industry Reactions
The private equity sector has expressed concerns over the increased tax burden imposed by these CGT changes.
However, extensive lobbying efforts resulted in a compromise, ensuring that the carried interest tax rate will be set at a flat 32% starting April 2025, rather than aligning it with the 45% income tax rate. This outcome represents a partial victory for investors in this sector, though the overall tax burden remains significantly higher than before.
Projected Revenue Increase
The government anticipates that these CGT reforms will significantly boost tax revenues. In 2023-24, CGT generated approximately £14.5 billion.
However, with the new changes, tax revenue from CGT is expected to surge to £31 billion by 2029-30. These projections underscore the substantial impact the new rates will have on tax collections, making CGT an increasingly important source of government revenue.
Statistics Summary
The CGT rate for basic rate taxpayers increased from 10% to 18%, while higher rate taxpayers now face a rate of 24%, up from 20%.
The Annual Exempt Amount, which was £12,300 in 2022-23, has now been reduced to £3,000 for 2024-25, bringing more investors into the CGT bracket.
Fun Facts
The UK's Capital Gains Tax (CGT) rates have shifted over time. From 1965 to 1988, there was a flat 30% rate.
In 1988, rates were tied to income tax bands, creating a variable structure. In 2008, a single 18% rate was introduced, simplifying the system. Recent changes reflect ongoing government adjustments to capital taxation priorities.
Conclusion
The recent increases in CGT rates represent a significant shift in the UK's tax landscape. Investors, business owners, and individuals must reassess their financial strategies to navigate these changes effectively.
The reduction in the Annual Exempt Amount further complicates the situation, making professional tax planning more crucial than ever. Staying informed and seeking expert advice will be key to adapting to this new fiscal environment.
Frequently Asked Questions
What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is a tax on the profit when you sell or dispose of an asset that has increased in value. It is the gain you make that is taxed, not the total amount received from the sale.
How do the new CGT rates affect me?
If you are a basic rate taxpayer, your CGT rate has increased from 10% to 18%. For higher rate taxpayers, the rate has risen from 20% to 24%. These changes mean that individuals will pay more tax on profits from asset disposals, significantly impacting investment decisions.
What is the Annual Exempt Amount (AEA)?
The AEA is the threshold above which CGT becomes payable. Previously set at £12,300 in 2022-2023, it has now been reduced to £3,000 for the 2024-2025 tax year. This reduction means that more individuals will be required to pay CGT on smaller gains than before.
How does the CGT increase impact Business Asset Disposal Relief (BADR)?
The CGT rate under BADR will rise from 10% to 14% on April 6, 2025, and further increase to 18% on April 6, 2026. This affects business owners who are planning to sell their assets, making it crucial to time disposals effectively to minimize tax liabilities.
What should I do in response to these changes?
It is advisable to review your investment and tax strategies in light of the new CGT rates. Consulting with a financial advisor or tax expert can help you navigate these changes effectively, ensuring that you minimize your tax liability while maximizing investment returns.
