Is Capital Gains Tax About to Go Up?

Labour's recent manifesto leaves the door open for potential changes to Capital Gains Tax (CGT).

With the Labour Party now in power, what might this mean for you?

The Landscape of Capital Gains Tax (CGT)

Capital gains tax (CGT) is levied on the profits made from the disposal of assets such as property, shares, and valuable possessions.?

Unlike other taxes, CGT was notably absent from Labour's pledge to freeze income tax, national insurance, and VAT for five years.

This omission has sparked speculation that CGT might be targeted for increases, especially given its potential to raise significant revenue.

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What is CGT?

CGT applies to the profit from selling an asset, not the entire sale price.

For example, if you bought a property for ￡200,000 and sold it for ￡350,000, the ￡150,000 profit would be subject to CGT.

The current annual exemption is ￡3,000, down from ￡12,300 just two years ago.

Rates vary based on your income tax bracket: basic-rate taxpayers pay 10% on most assets and 18% on residential property gains, while higher and additional-rate taxpayers face 20% and 28% respectively.

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CGT Exemptions

CGT does not apply to profits from selling your main home, provided it has been your primary residence for the entire ownership period.

Gifts to spouses, civil partners, and charities are also exempt.

For business owners, there’s business asset disposal relief, which allows a 10% CGT rate if conditions are met.

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Labour's Stance on CGT

The Labour Party has taken a firm stance on ensuring fair taxation.

Although they have ruled out imposing CGT on the sale of main homes, increases in other areas of CGT seem likely.

Shadow Chancellor Rachel Reeves has previously supported aligning CGT rates with income tax rates, which could double the tax rate for many.

This move aims at closing the gap between income tax and CGT rates to prevent high earners from exploiting lower CGT rates.

Labour is also considering reducing the annual CGT allowance further, making it imperative for investors to reassess their tax planning strategies.

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Potential Impact of Labour's Policy

With Labour's focus on equitable tax systems, experts predict an inevitable rise in CGT rates.

This could significantly impact investors, landlords, and anyone planning to sell high-value assets.

The aim is to ensure that those with the means to pay more do so, contributing to broader social welfare initiatives.

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What You Can Do

Some of these tips are easier than others, but if you know you have a looming liability and start thinking about it now, there may well be something you can do to reduce your CGT bill or mitigate it altogether.

1. Use your CGT allowance Regularly use your capital gains tax allowance (annual exempt amount). For investment portfolios, sell and reinvest holdings to utilise the ￡3,000 allowance. You cannot roll over any unused allowance, so use it or lose it.
2. Give money or assets to your spouse or civil partner Transfers to a spouse or civil partner aren’t taxed, allowing you to double your annual exempt amount. Ensure these are outright gifts and not temporary transfers.
3. Don’t forget your losses Offset losses from underperforming assets against gains. Report losses to HMRC within four years to carry them forward.
4. Deduct your costs Deduct costs related to the purchase, sale, and improvement of assets to reduce taxable gains.
5. Increase your pension contributions Boost pension contributions to potentially lower your taxable income and reduce CGT from 20% to 10%.
6. Use your ISA allowance Investments in ISAs are sheltered from CGT. Utilise the ￡20,000 annual ISA allowance to shield gains from tax.
7. Try Bed and ISA Sell shares or funds and rebuy them within an ISA to shelter future gains from tax.
8. Donate to charity Donations of assets to charity are exempt from CGT.
9. Consider an Enterprise Investment Scheme EIS investments in small businesses offer CGT shelter after three years. Suitable for high-risk tolerance investors.
10. Make the most of gift holdover relief Gifts of business assets may qualify for holdover relief, deferring CGT until the recipient disposes of the asset.
11. Be aware of chattels that are exempt from CGT Some possessions, such as wasting assets and personal cars, are exempt from CGT. Sales of chattels under ￡3,000 are also exempt.
12. Be careful if you give away assets Gifts to anyone other than a spouse or civil partner may trigger CGT. Gifts are treated as sales at market value.

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Conclusion

The complexities of capital gains tax require foresight and planning.

As political landscapes shift under the new Labour government, staying informed and prepared is crucial.?

For personalised advice and strategies to manage your CGT liabilities, get in touch with Tax Expert today.

We’ll help you to stay ahead and stay informed of potential tax changes.