Autumn Budget 2024 - What's happening with CGT?

With an Autumn Budget set for 30 October and against a fiscal narrative that there is a £22bn ‘black hole’ in the public finances, speculation is increasing on whether the Budget could bring with it capital gains tax (CGT) reform. 

Why is there so much speculation?

Labour’s manifesto was silent on capital gains tax reform and Labour had indicated elsewhere that they had “no plans” to increase CGT.  Shortly after winning the election, however, Labour commissioned a spending audit, the headline finding of which was that the audit had uncovered £22bn of unfunded pressures, signalling the need for further tax rises and/or austerity measures (although at the recent Labour conference, the Chancellor has since ruled out a return to austerity).

The Budget has been set against a backdrop of ‘difficult decisions’, with those with the broadest shoulders bearing the heavier burden. While what that means for CGT is not yet known, with Labour’s manifesto commitments not to increase national insurance, the basic, higher, or additional rates of income tax, VAT or the headline rate of corporation tax, and with these taxes contributing to the vast majority of tax revenues, there are a smaller number of options on the table.  This has brought into focus those taxes not specifically protected, such as CGT. 

Why is capital gains tax important for business owners? 

For business owners seeking to realise their investment in their business or effect a succession of it to management or the next generation of their family, they can currently benefit from Business Asset Disposal Relief (previously known as Entrepreneur’s Relief) on the first £1 million of lifetime gains (if they meet certain conditions) at a CGT rate of 10% and 20% on any gains thereafter. There's been much commentary historically that this is low compared to income tax rates of up to 45% and debate on whether the rates should be more closely aligned.

An increase would have a significant effect on business owners. For example, if there was full alignment, they would have to pay up to an additional 25% in tax, often of the entire value of their businesses, on a sale. 

What's the key concern around potential rate changes? 

Although the rate has been a topic which has driven intense debate across the political spectrum over the years, this is also a story that cannot just be about the simple equalisation of the headline rate, for example: 

• Consideration must be given to the extent of the increase in the CGT rates and the potential for correlating behavioural changes.  Whether that means a reduction in transactions or discouraging entrepreneurial investment in the UK in the first place.  An area that, particularly in light of the Government’s growth agenda and the role entrepreneurial activities play in contributing to our tax base through business profits and employing people, will need careful consideration.
• Under the current capital gains tax regime, if assets are held for a long time, people are paying tax on the inflationary increase in value, even if on a sale they are no better off in real terms. With an increase in the rates, the effects will be intensified without introducing some sort of relief.

The most likely changes, in my view, are therefore a more moderate increase in the main rate of CGT, for example, the main rate was 28% up to 2015/16.  If rates are to draw closer to income tax rates, then thought will need to be given to an inflationary allowance or rate adjustment to recognise the distinction between short-term and longer-term gains.  There is also then the question of business gains arising to our entrepreneurial risk takers who, under both Conservative and Labour Governments, have always been incentivised and rewarded in some way with a favourable CGT rate.

When would any CGT changes come into effect? 

If there were a change then based on when tax rate changes have been introduced historically the key dates would be either: 

The Autumn Budget

It wouldn't be unprecedented for any rate change to apply from the date of the Budget (30 October), when the change is announced.

6 April 2025

If there isn't an immediate change, then this is likely to be from the start of the next tax year.

While instinctively it might be thought any rate rise should be from the date of the Autumn Budget, if Rachel Reeves is concerned about raising the greatest amount of CGT revenue in the current tax year, she will need to consider the attraction of pre-announcing a rise to accelerate CGT events before the increase takes effect. In contrast, the impact of a 30 October change may have the effect of people delaying important disposal events which may be less attractive as a result, or where they need to consider their options. 

What should business owners and investors be thinking about? 

Business owners and investors are currently faced with uncertainty over what (if any) changes to the capital gains regime could be announced on 30 October and, if so, when that change would come into effect. Faced with such uncertainty there is not necessarily a single right course of action and it’s important to consider the possible options fully.

While there is little time between now and 30 October, irrespective of what happens at the Autumn Budget, business owners planning for a future succession or exit event should be considering their position at an early stage in light of any potential future changes.

"We have seen an uptick in deal activity for those looking to close transactions prior to any potential changes, however any longer term impact to the M&A market will depend upon the extent of any increase."

Peter Terry Partner, Corporate Finance

For more insight and guidance, get in touch with Dan Hartland.