A Comprehensive Analysis of Changes to Capital Gains Tax in the UK Labour Budget

Thursday 28 November, 2024

The 2024 Autumn Budget introduced by the UK Labour government has implemented significant changes to the Capital Gains Tax (CGT) framework. This move, part of a larger tax reform strategy, aims to address economic disparities while strengthening public finances. These updates affect a wide range of taxpayers, from individual investors to business owners.

Mark Slobom, Financial Adviser in Harpenden said

“The recent changes to Capital Gains Tax represent a potential shift in how taxpayers need to approach financial planning. With higher rates for non-residential assets and phased increases in reliefs like BADR and Investors’ Relief, timing and strategy are now more critical than ever. For those affected, seeking professional financial advice early can help minimise liabilities and make the most of available reliefs in a rapidly evolving tax landscape.”

Below is an examination of these changes and their implications.

Overview of Capital Gains Tax Changes

The adjustments to CGT rates and associated reliefs represent some of the most substantial tax policy changes in recent years:

Rate Increases Across the Board

For assets excluding residential property, the CGT rate for basic-rate taxpayers rises from 10% to 18%, and for higher-rate taxpayers from 20% to 24%. These changes took effect for disposals occurring on or after 30 October 2024
Residential property retains its pre-existing rates of 18% and 24%, ensuring alignment across asset classes while maintaining fairness for property owners.

Changes to Relief Rates

Business Asset Disposal Relief (BADR): This relief, critical for entrepreneurs disposing of business assets, sees its rate fixed at 10% until April 2025, when it increases to 14%. From April 2026, the rate will rise further to 18%.
Investors’ Relief: Similarly, the preferential rates for long-term investments will follow a parallel phased increase

Impact on Trusts and Estates

Trustees and personal representatives of estates will now face a CGT rate of 24% for disposals after 30 October 2024, up from 20%, bringing them in line with higher rate taxpayers

Rationale Behind the Changes

The government has positioned these reforms as a step toward fairness in taxation, targeting wealthier individuals and high-value transactions to contribute more significantly to public services like healthcare and education.

The Office for Budget Responsibility (OBR) estimates these changes will generate an additional £2.5 billion over the forecast period, highlighting their critical role in supporting the government’s fiscal goals.

Implications for Different Groups

Individual Investors

The increased rates mean higher tax liabilities for those selling non-residential assets, particularly individuals in the higher income brackets. Planning disposals strategically will be key to managing these costs.

Entrepreneurs and Business Owners

The rising rates under BADR may impact decisions about when to sell business assets. Business owners seeking to benefit from the lower 10% rate must act before April 2025. For those planning longer-term exits, understanding the phased increases will be crucial

Trusts and Estates

The higher rate for trustees and personal representatives could necessitate updated financial planning for estates holding significant non-residential assets.

General Economic Impact

The reforms aim to align the UK’s CGT regime more closely with international peers, with the government noting that even after these changes, the UK’s rates remain competitive among G7 nations.

Real-Life Scenarios: How the New Capital Gains Tax Changes Could Affect You

Example 1: Impact on an Individual Investor Selling Non-Residential Assets

Jane, a higher-rate taxpayer, decides to sell shares in a company she has held for several years, generating a taxable gain of £50,000.

Under the Previous Rates: Jane would have paid CGT at 20%, resulting in a tax liability of £10,000.
Under the New Rates (effective from 30 October 2024): With the higher rate now at 24%, Jane's tax liability increases to £12,000—a £2,000 rise.

This increase highlights the importance of strategic planning, such as timing disposals before rate changes or utilising tax-free allowances effectively.

Speaking to a qualified financial adviser could help Jane explore tax-efficient strategies and minimise the impact of the higher rates.

Example 2: Business Owner Timing a Sale Under BADR Changes

Karim owns a small business and plans to sell it in April 2026, expecting a £1 million gain. He qualifies for Business Asset Disposal Relief (BADR), which offers a reduced CGT rate.

If Karim Sells Before April 2025: He pays 10% CGT on the gain, resulting in £100,000 in tax.
If Karim Sells After April 2026: The rate under BADR rises to 18%, increasing his tax liability to £180,000—an £80,000 difference.

By selling before the phased increases take effect, Karim could save a significant amount.

Consulting a financial adviser can help Karim understand his options and decide on the best timing for his sale, ensuring his long-term financial goals are met.

Importance of Seeking Professional Advice

Navigating these changes requires careful consideration of their timing and financial impact.

Our professional financial advisors can provide invaluable assistance by:

Reviewing asset portfolios to identify potential tax liabilities under the new rates.
Suggesting tax-efficient investment strategies, such as utilising tax-free allowances or deferring disposals.
Advising on succession planning, particularly for business owners and estates facing higher CGT rates.

Our team are also well-positioned to guide individuals and businesses on leveraging tax reliefs, like BADR and Investors’ Relief, to their full advantage. Their expertise ensures compliance with HMRC regulations while maximising financial outcomes.

Looking Ahead

The changes to CGT represent a pivotal moment in UK tax policy. While they aim to enhance fairness and sustainability in public finance, they also bring increased complexity for taxpayers.

Whether you are an investor, business owner, or trustee, understanding these adjustments and planning proactively is essential. Engaging with a qualified independent financial adviser at any of our country-wide offices will help you to be prepared to manage the implications and make informed financial decisions.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. This is for information only and does not constitute advice. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.

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