Changes to Capital Gains Tax: Labour’s Approach to Future Reforms

Introduction

Capital Gains Tax (CGT) is a significant source of revenue for the UK government, but Labour has indicated that further reforms may be on the horizon. While no immediate changes to CGT rates have been confirmed, Labour has suggested that aligning CGT with income tax rates could be a possibility in the future. This blog will explore potential CGT reforms and what they could mean for businesses and individuals.

1. Current Capital Gains Tax Structure

CGT is currently charged at rates of 10% for basic-rate taxpayers and 20% for higher-rate taxpayers (or 18% and 28% for gains on residential property). CGT applies to profits made on the sale of assets such as shares, property, or businesses.

  • Key Fact: CGT rates are generally lower than income tax rates, which is why Labour may consider aligning the two in the future.

2. Potential Changes to CGT Rates

Labour has left open the possibility of aligning CGT with income tax rates, which could see CGT rates rise to 20-45%, depending on the taxpayer’s income bracket. This could significantly increase the tax burden on individuals and businesses who realize gains from asset sales.

  • Key Impact: Potential increases in tax liabilities for those selling shares, property, or businesses.

3. Review of CGT Reliefs

Labour is also reviewing CGT reliefs, such as Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which allows business owners to pay a reduced CGT rate when selling their businesses. This relief may be reduced or eliminated under Labour’s reforms to increase revenue.

  • Key Impact: Reduced or eliminated CGT reliefs could affect small business owners and entrepreneurs.

Conclusion

While Labour has not yet committed to immediate changes in CGT rates, businesses and individuals should be aware of the possibility of future reforms. Potentially aligning CGT with income tax rates could significantly increase tax liabilities for those selling assets. As always, professional tax advice is essential to navigate these changes.