U.K. Chancellor Rachel Reeves has underscored that economic growth will be the new government's primary focus. However, investors are curious about the potential implications of this political shift on capital gains taxes, especially following the Chancellor's statement on 29th July which suggested a need to bolster public service finances.
Media reports suggest that the Labour government is considering proposals that could potentially raise £8 billion through increases in Capital Gains Tax (CGT) and/or significant alterations to inheritance taxes. In her recent statement, Rachel Reeves confirmed that the government was taking forward reforms in a range of areas, including replacing the concept of domicile status with a new residence-based regime, and issuing a call for evidence in relation to 'carried interest' on which fund managers currently pay CGT at 18% and 28%.
Otherwise there has been little comment on wider CGT reforms, and it is likely that the first official update in this regard will be in the Autumn budget statement on 30th October 2024.
To understand the potential for future CGT reforms under Labour, it is useful to review the history of CGT changes under various U.K. governments and key milestones since its introduction in 1965. It is important to note that, with a few exceptions (including the use of anti-forestalling arrangements), CGT reforms have been largely forward-looking and not applied retrospectively.
1965
In 1965, under Labour Prime Minister Harold Wilson, Chancellor Jim Callaghan introduced CGT. All capital gains above £1,000 were taxed at rates of up to 30% while the standard rate of income tax was 41% (and higher for annual earnings above £2,000).
1980s
The 1980s saw the Conservative government introduce changes to target the tax on real gains, excluding the impact of inflation – a move that benefited investors. However, in the 1988 budget, Chancellor Nigel Lawson announced that income and capital gains would be taxed at the same rate.
1990s
In 1998, Labour Chancellor Gordon Brown announced reforms to abolish the indexation allowance that was used to exclude inflation from gains, replacing it with taper relief. This new system incentivised investors to hold assets for longer and was more generous for business assets, taxing them at progressively lower rates depending on the length of ownership.
2000s
In the 2000s, the Labour government under Prime Minister Gordon Brown and Chancellor Alistair Darling scrapped taper relief and reintroduced a flat rate of CGT for the first time since 1988. It was set at 18%, below the income-tax rates for lower and higher earners of 20% and 40% respectively. This shake-up also introduced entrepreneurs' relief, which applied a 10% rate to some gains of up to £1 million.
2010s
In 2010, the Conservative-Liberal Democrat coalition, with George Osborne as Chancellor, introduced a CGT rate of 28% for higher earners. This was an increase from the earlier flat rate, although still lower than the higher income tax bracket of 40%. The lifetime limit for entrepreneurs' relief increased over time to £10 million.
2020
In 2020, Chancellor Rishi Sunak cut entrepreneurs relief from £10 million to £1 million, still with a tax rate of 10%, and renamed it business asset disposal relief. Further changes included a reduction in the CGT annual allowance to £6,000 from 6 April 2023, and £3,000 from 6 April 2024.
Looking Ahead
Although its stated aim is to boost economic growth, the newly elected Labour government has not ruled out changes to capital gains taxes, giving the Chancellor a delicate balancing act. Action taken in the next Budget could include changes to CGT rates (bringing them more in line with income tax rates) or further reducing the tax-free allowance. Based on previous announcements, it appears likely that any changes announced will come into force either from the date of the Budget announcement, Royal Assent, or from the next tax year beginning 6 April 2025, rather than retrospectively.
Originally Published 1 August 2024
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