In this article we explain the basics of what Captial Gains Tax is, what has changed in the 2024 Budget, and why this could be important for you.
Heads up! As of the 31st October 2024, the lower rate of Capital Gains Tax has increased from 10% to 18%, while the higher rate rose from 20% to 24%.
If you’re selling a second home, don’t worry – the current rates of 18% and 24% for residential property sales aren’t changing.
🚨For the full breakdown on this year’s Autumn Budget, read our full summary
So, what is Capital Gains Tax (CGT)? And why does it matter to me? These are probably two very relevant questions for most people, in the wake of the October 2024 Budget.
It was anticipated that the Chancellor, Rachael Reeves, had a plan to raise taxes in her first Budget, and that CGT would be in her sights as a tool to do this. So, what changes have been made, who does this impact and how, and what could happen in the future?
It is worth highlighting that CGT can be a complex area of taxation, and so in this article we aim to explain the basics of what CGT is, what has changed in the 2024 Budget, and why this could be important for you.
What is Capital Gains Tax (CGT)?
You need to pay Capital Gains Tax when you make a profit from selling certain types of assets.
The types of assets that generally attract CGT include:
- Land/Property
- Investment Property
- Shares
- Art
- Cryptocurrencies
- Fine jewellery
- Selected antiques
Certain assets are exempt from CGT – exemptions include:
- Your home (primary residence),
- Cars
- Cash
- Gambling winnings
- Chattels (a very broadly drawn group of other exempt assets, which typically includes anything with a useful life of less than 50 years)
It is always best to check with a tax advisor whether the gain on a particular asset is going to be taxable or not. Get in touch with our experts today.
How Capital Gains Tax (CGT) is calculated
Gains are calculated along the following lines - if you own a piece of land that you paid £100,000 for, and sell it for £150,000, you have a capital gain of £50,000. If the land was sold for £90,000 you would have a capital loss of £10,000.
To determine the amount of CGT payable, you take the total of your capital gains in the tax year, and subtract any capital losses in the same year (you can chose to claim any losses brought forward if you wish), and then deduct any CGT reliefs that may be available to you.
Individuals in the UK get an annual CGT exemption, which is currently £3,000, so any gain above this is taxable. This is added to your total income, and the rate of CGT is either the Lower Rate (on the part that is within the basic rate of £50,270), or Higher Rate if any part of the gain is above £50,270.
Capital Gains Tax (CGT) rates in the UK 2024/25
Previously there were two sets of CGT rates;
- Gains on residential property were taxed at either 18% (Lower Rate) or 24% (Higher Rate) and
- All other gains were taxed at 10% (Lower Rate) or 20% (Higher Rate).
Now the new rates bring all capital gains up to the residential property rates, creating just one set of rates :
- 18% Lower Rate
- 24% Higher Rate
This increase was effective from 31 October 2024, so any future sales of assets will now be subject to these new rates.
Putting this into context, if someone earning a salary of £70,000 sold the land mentioned above for £150,000 today, they might pay £11,280 in CGT, assuming they had their annual CGT exempt available and no other reliefs or losses were due. If they had sold it for the same amount in September 2024, they would have paid £9,400 – a difference of nearly £2,000.
What about business assets and Business Asset Disposal Relief (BADR)?
When a business owner sells their business, or a shareholder of a company sells their shares, as long as certain conditions are met, they may qualify for Business Asset Disposal Relief (BADR), which allows gains up to a lifetime limit of £1 million to be taxed at a preferential rate.
Prior to the 2024 Budget, this rate was set at 10% with the excess being subject to CGT at 20%. In the Budget, it was announced that the rate on the first £1 million of gains would:
- Increase to 14% from 6 April 2025
- Increase to 18% from 6 April 2026
In this way, the rates of CGT on business asset disposals have been equalised with other disposals, so that from 2026, there will be only two CGT rates (18% and 24%) across all chargeable assets.
In real terms, this still offers a saving to business owners looking to sell or retire, as the first £1 million of gains will attract the lower rate, albeit that this will have increased from 10% to 18% over the next two years.
What about Capital Gains Tax (CGT) in the future?
It is often difficult to predict what Governments will do in order to raise more taxes, and CGT is no different. Here is our top five pre-2024 Budget CGT predictions that didn’t materialise this time:
- Significantly raise the rates of CGT
- Equalise the CGT rates with income tax
- Cancel the annual CGT exemption
- Restrict or limit the amount of exempt asset disposals
- Scrap BADR altogether
None of these were introduced in October 2024, however it remains to be seen whether further changes to CGT will come in later years.
What to do about Capital Gains Tax (CGT) now?
The announcement of the 2024 Budget release date, and the uncertainty over the likely tax rises, meant that there was very little scope for most people to take action to benefit from pre-Budget CGT rates. As expected, within the Budget were sophisticated anti-forestalling rules that aimed to prevent anyone from creating a beneficial agreement that would allow them to revert to pre-Budget rates if required.
If you own assets that are likely to generate a taxable gain and cause CGT to become payable, or if you are a business owner looking to retire and thinking about a sale, don’t panic.
It will be important to review your CGT position, to understand what potential liabilities you may have in the future, and establish a plan to deal with your CGT affairs, and hopefully minimise tax costs, or look at other ways to mitigate any expected CGT liabilities.
If you would like to discuss your CGT queries, or anything in relation to your tax affairs, please get in touch.
