Exploring Changes to Capital Gains Tax (CGT) in the UK: An Analysis of Current and Proposed Rules - Ad Valorem
5 minutes
The recent UK budget announcement on 30 October 2024 introduced several significant changes to the Capital Gains Tax (CGT). This article discusses the existing CGT rates and highlights the impending changes, illustrating the impact with examples. Specifically, the analysis includes the impact on Business Asset Disposal Relief (BADR), underlining why it may be advantageous to execute business disposals before April 2025.
Old CGT Rules:
Sections 1H and 1I of the Taxation of Chargeable Gains Act 1992 define CGT rates, differentiating rates based on taxpayer income level and types of assets as follows:
- Standard Rates:
- 10% for gains within an individual’s unused basic rate band of £37,700 (subject to change due to gift aid donations and private pension contributions).
- 20% for gains subject to the higher rates.
- Residential Property Disposal and Carried Interest:
- 18% for gains within an unused basic rate band of £37,700 (subject to change due to gift aid donations and private pension contributions).
- 24% for gains subject to the higher rates.
- Business Asset Disposal Relief:
- 10% on gains within £1 million lifetime limit; and
- 20% on gains of more than £1 million.
- Investor’s relief:
- 10% on gains within £10 million lifetime limit; and
- 20% on gains of more than £10 million.
The old CGT regime provides distinct rates for trustees and personal representatives, generally aligning with the higher rates of 20%, 24%, and 28% for residential carried interest.
Proposed CGT changes:
- Increased rates of disposals effective from 30 October 2024:
- Basic rate taxpayers: The rate increased from 10% to 18%. These rates are now in line with the CGT rates on the disposal of residential properties for basic rate taxpayers.
- Higher-rate taxpayers: The rate increased from 20% to 24%. These are in line with the CGT rates on the disposal of residential properties for higher-rate taxpayers.
- Trustees and Personal Representatives: Increased from 20% to 24% on relevant disposals.
- Changes to the Business Assets Disposal Relief (BADR) and Investor’s Relief (IR) effective from 6 April 2025:
- BADR: The lifetime limit of BADR remains at £1 million. But the rate of CGT increased from 10% to 14% on the first £1 million. Any eligible gains above £1 million will be taxed at the higher rate of 24%.
- Investor’s relief (IR): The lifetime limit of £10 million has been reduced to £1 million to align with BADR’s lifetime limit. This means that any eligible gains within £1 million will be taxed at the rate of 14% and any gains above the £1 million threshold will be taxed at the rate of 24%.
The new measures maintain the current CGT rates of residential property gains at 18% and 24% for basic rate and higher rate taxpayers respectively.
Worked Examples:
- Business Asset Disposal Relief (BADR):
Scenario: Mr John owns a business which he wants to sell. The gain on the disposal (after taking into account the Annual Exempt Amount) is £1,200,000.
- Selling before 6 April 2025: If Mr John makes the sale before 6 April 2025, then the current rate of 10% on the first £1 million of gain and 20% on gains above £1 million would apply. The CGT payable in this case would be £140,000 (£1 million x 10%) + (£200,000 x 20%).
- Selling after 6 April 2025 but before 6 April 2026: If Mr John makes the sale after 6 April 2025 but before 6 April 2026, then the increased rates of CGT of 14% on the first £1 million gain and 24% on gains above £1 million. This would increase the CGT liability to £188,000 (£1 million x 14%) + (£200,000 x 24%). This is an increase of £48,000 as compared to if the sale was made before 6 April 2025.
- Selling after 6 April 2026: If Mr John makes the sale after 6 April 2024, then the rate of BADR would further increase to 18% for the first £1 million gains and 24% on gains of more than £1 million. The tax liability would be £228,000 (£1 million x 18%) + (£200,000 x 24%). This is an increase of £88,000 as compared to if the sale was made before 6 April 2025 and £40,000 as compared to if the sale was made after 6 April 2025 but before 6 April 2026.
2. CGT on the sale of assets which are neither residential nor eligible for BADR or IR.
Scenario: Sarah, a higher-rate taxpayer, sells a commercial building she owns making a gain of £500,000 (after taking into account the Annual Exempt Amount).
- Sale before 30 October 2024: If the sale was made before 30 October 2024, then the CGT on the gain would be taxed at the rate of 20% and the tax liability would be £100,000 (£500,000 x 20%).
- Sale on or after 30 October 2024: If the sale was made on or after 30 October 2024 then the new rate of CGT of 24% would apply (18% for basic rate taxpayers). This increases Sarah’s CGT liability to £120,000. This is an increase of £20,000 as compared to if the sale was made before 30 October 2024.
Strategic Recommendations for Taxpayers:
- Consider Accelerating Asset Sales Before Rate Changes: To minimise CGT liability, taxpayers who plan to sell chargeable assets, particularly shares or business interests, may benefit from doing so before 30 October 2024 or 6 April 2025.
- Utilise Business Asset Disposal Relief Pre-April 2025: For business owners, selling assets qualifying for Business Asset Disposal Relief before April 2025 can help secure a 10% rate, avoiding the upcoming increase to 14% and eventual 18%.
Conclusion:
The upcoming changes to CGT rates represent a significant shift, particularly for high-value disposals and business sales. These examples highlight the value of early tax planning to mitigate increased liabilities. Taxpayers should consider seeking professional advice to navigate these changes effectively, especially for Business Asset Disposal Relief transactions, to ensure optimised timing and tax efficiency. Please contact the tax team at Ad Valorem Group to get tailored advice on any planned sales and understand their capital gains implications.
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