Opinion: Expect increases to capital taxation in the Budget

While no-one can predict exactly what will be in chancellor Rachel Reeve’s first Budget on October 30, one area where she is almost certain to focus – given that she has already declared she has a £22bn ‘black hole’ in public finances to plug – will be capital taxes.

Labour’s election manifesto did not mention capital taxes.

But its declared intention to ‘close the tax gap’, along with Keir Starmer’s refusal to rule out increasing capital gains tax (CGT) if he were elected, both point to this being near the top of the government’s priorities when it comes to raising extra revenue.

Mary Schofield, tax partner at Lovewell Blake (Image: Lee Blanchflower) Research published by the London School of Economics shows that over a ten year period, just 3pc of adults pay any CGT at all.

Strikingly, more than half of all the CGT paid in 2020 (52.2pc) was paid by just 5,000 individuals.

READ MORE: Opinion: What could happen to inheritance tax in the Budget?

So what measures could Ms Reeves take to increase capital tax receipts?

The most obvious one will be to raise the rate of CGT. Currently capital gains are taxed (after allowances) at 20pc, with a higher rate of 24pc for gains made on properties which are not the taxpayer’s principal residence.

Given that the vast majority of those who pay CGT are higher or additional rate taxpayers, their rate of capital taxation is considerably lower than if that income was earned.

There have been calls in the past for individuals to pay CGT at their marginal income tax rate. Others have lobbied for a flat rate of 40pc, reflecting the income tax rate paid by the majority of those who enjoy capital gains.

We just don’t know what the chancellor will do, but my best guess is that any increase in CGT rates will be stepped, with an initial rate of, say, 30pc. This could come with a promise to increase this still further in future Budgets.

Ms Reeves might also keep a lower CGT rate of 20pc for basic rate income taxpayers.

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Another area which could be vulnerable is business asset disposal relief, formerly called entrepreneurs’ relief, which allows eligible gains of up to £1m to be taxed at 10pc.

This is a relief which mostly benefits small business owners, so it would be a shame to see it taken away.

The timing of all of this will be crucial. On the one hand, allowing a window before increased capital tax rates come into force would probably see a rush of deals, providing a short-term tax revenue gain for the exchequer, something which would be very handy.

But will the chancellor be happy to see potential higher tax revenue lost, or will she introduce any new rates immediately, at midnight on Budget day itself?

With formal commitments already made to leave income tax rates alone and a longstanding aim to tax higher rate earners more, this area should be considered by all affected immediately.

So while we don’t know the detail, it is a fair bet that increases in CGT will feature front and centre on October 30.

Join the Lovewell Blake experts and EDP Editor Richard Porritt for breakfast on October 31 where the Budget will be explained and discussed. Search online for Lovewell Blake events to book your place.