The future of tax in the UK – Capital Gains Tax

On Monday 29 July, Rachel Reeves delivered her analysis of the public finances painting a bleak picture of the position inherited from the Conservative Government, although some argued that most ‘discoveries’ should already have been known. Whilst no new tax policy was delivered during her speech, she fixed the Autumn Budget date for 30 October 2024.

In their election manifesto, the Labour Party provided a high-level narrative on their tax policies and pledged not to “increase taxes on working people, … not increase National Insurance, [nor] the basic, higher or additional rates of Income Tax”.¹ Noticeably however the Labour Party’s manifesto did not comment on Capital Gains Tax (“CGT”) absent their pledge to close the carried interest ‘loophole’. Separately, specific commentary on the future of the taxation of carried interest in the UK can be found here.

The absence of specificity as to the ongoing taxation of capital gains has led to commentators speculating that the rate of CGT could be increased or the operation of the tax itself may be reformed.

In June 2024 HMRC published a report reflecting the estimated revenue impact of increasing the rate of CGT by 1 percent, 5 percent and 10 percent.² This is particularly relevant given the enhanced role afforded to the Office for Budget Responsibility when it comes to policy making in the 2024 King’s Speech.³ The estimated tax impacts have been summarised below:

The history of capital gains tax (CGT)

CGT was introduced by the Labour Chancellor James Callaghan in 1965 to tax gains realised on the disposal of assets by individuals, personal representatives, and trustees⁴.

Since inception CGT has been substantially reformed by both parties. We have provided a summary of these reforms below. This summary is high-level in nature and focusses on the major changes rather than rate changes that have been introduced throughout history.

• 1965 – CGT introduced by Labour Chancellor James Callaghan.
• 1980s – 30% rate of CGT and indexation relief introduced by the Conservative Chancellor Geoffrey Howe.
• 1988 – Conservative Chancellor Nigel Lawson aligned CGT with income tax.
• 2008 – Labour Chancellor Alistair Darling introduced a new 18% flat rate of CGT and 10% for Entrepreneurs (commonly referred to as Entrepreneurs' Relief).
• 2010 – Conservative Chancellor George Osbourne introduced a new 28% rate of CGT for higher rate taxpayers.

Potential timing of a change to CGT

Reforms to CGT have been introduced to apply both immediately following an announcement and from the start of the next tax year. Typically changes to the headline rates of CGT are less complex and have been both announced and legislated for at the Budget.

The widespread reforms introduced by Alistair Darling in 2008 were complex and therefore were introduced from the start of the following tax year. Conversely, at the 2010 Budget when George Osborne introduced a new 28% rate of CGT for higher rate taxpayers and increased the lifetime limit for Entrepreneurs’ Relief these provisions took effect from 23 June 2010 - the day after the Budget.

The current CGT position

The rate of CGT payable on the realisation of gains is determined by the nature of the asset sold and the level of the taxpayer’s earnings. In contrast to other jurisdictions the holding period of the assets is typically not relevant to the rate of CGT applicable. Under existing legislation, the rates of CGT are as follows:

• 10% on assets which qualify for Business Asset Disposal Relief.
• 24% on gains realised from residential property.
• 28% on gains from carried interest.
• 20% on all other assets.⁵

What have the Government said?

The Government’s election manifesto was broadly silent on CGT singling out a reform to the taxation of carried interest distributions received by private equity executives.

However, in the run up to the election both Rachel Reeves and Angela Rayner provided some commentary.

In March 2023, Rachel Reeves stated on the Today programme that ‘I don’t have any plans to increase capital gains tax’. That being said, the party’s deputy leader Angela Rayner has criticised the way in which CGT applies.⁶ Further, in 2018 Rachel Reeves wrote “Capital gains tax could be reformed, halving the annual allowance, having it paid at income tax rates and improving tax compliance” ⁷.

What options are available?

J.P. Morgan does not provide tax or legal advice. We therefore recommend that individuals should consult their personal tax advisor prior to implementing any of the options set out below. 

1. Triggering a disposal of assets

The current rates of CGT are known and certain.

Where an individual anticipates disposing of an asset, e.g., investment property, shares in a business or investment assets, or they wish to rebalance their existing portfolio they may wish to take advantage of the opportunity to do so under the current regime and bring forward the date of disposal of the assets, paying tax at the current prevailing rate.

Taxpayers should note the potential application of the ‘Bed and Breakfasting’ provisions.⁸ These rules generally apply where an investor sells and subsequently repurchases the same shares either the same day or at any point in the following 30 days. Where these provisions apply, the investor is deemed to have sold the newly acquired shares and not the pre-existing shareholding. This can mean that the disposal does not suffer CGT at the rate prevailing at the time of the initial sale.

2. ‘Rebase’ assets

Individuals may seek to trigger a disposal of their assets in several ways including the transfer of assets to family members (excluding their spouse) or familial investment vehicle, settlement of assets onto trust, sale and subsequent repurchase of investments or substantially the same investment (save for the application of the Bed and Breakfasting rule).

The transfer of assets to connected parties will trigger a deemed market value disposal and the individual would be subject to CGT on the realised gain. The recipient would hold the asset at the current market value and be subject to CGT on any growth in value of the asset on a future disposal.

3. Invest through wrappers

Certain investment wrappers e.g., widely held offshore funds, offshore bonds, ISAs, and SIPPs do not suffer UK taxation on either the receipt of income or disposal of assets held within the structure. There can be tax implications when extracting funds from certain investment wrappers and careful advice needs to be taken. Typically, these structures are used for investments that are intended to be held long-term and can provide tax deferral.

4. Relocation from the UK

Non-UK tax resident individuals do not typically suffer CGT on the disposal of their assets save for assets deriving their value from UK land. As such, prior to realisation of a material capital event an individual may contemplate breaking their UK tax residence status. It is worth noting that breaking UK tax residence is complicated and anti-avoidance provisions exist which seek to counter arrangements whereby individuals only remain non-UK tax resident temporarily, typically less than 5 tax years. Where these anti-avoidance provisions apply gains realised during the period of non-UK tax residence may be brought back into charge in the year of return at the prevailing rates.

Contact your J.P. Morgan Team

Should you wish to discuss this topic in more detail please contact your J.P. Morgan Team.

¹ https://labour.org.uk/change/my-plan-for-change/

² https://www.gov.uk/government/statistics/direct-effects-of-illustrative-tax-changes/direct-effects-of-illustrative-tax-changes-bulletin-june-2024?trk=feed_main-feed-card_reshare_feed-article-content#capital-gains-tax

³ https://assets.publishing.service.gov.uk/media/6697f5c10808eaf43b50d18e/The_King_s_Speech_2024_background_briefing_notes.pdf

⁴ https://researchbriefings.files.parliament.uk/documents/SN00860/SN00860.pdf

⁵ https://www.gov.uk/capital-gains-tax/rates

⁶ https://www.bbc.com/news/uk-politics-65122284?secureweb=Teams

⁷ https://labourlist.org/2018/03/a-radical-overhaul-rachel-reeves-full-speech-launching-the-new-economy/

⁸ https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg13370