A key area of speculation following the release of the major parties manifestos is around capital gains tax (CGT), which may seem a little odd given that the Conservatives have ruled out a rate increase, Labour haven't pledged to increase it, and have stated that their manifestos are fully-costed and they have “no plans” to increase CGT.
CGT is, of course, always a key area of interest, so the potential impact of any General Election result is always worth considering.
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 (BADR) 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 aligned.
Alignment would have a significant effect on business owners. They would have to pay up to an additional 25% of the entire value of their businesses in tax on a sale.
What's the key concern around potential rate changes?
Given the contrast between the CGT main rate of 20% and the income tax top rate of 45%, the question of whether the two rates should be more closely aligned has often been under the spotlight. This is an area the main political parties have all considered in recent years.
The Liberal Democrats manifesto has proposed CGT reform and the Conservatives have ruled out a rate increase. While Labour have indicated that they have “no plans” to increase CGT, they haven't listed CGT as one of the taxes they're committed to not increasing the rate of in their manifesto.
Many commentators have expressed concern that there's very little headroom in the public finances and, should they come to power, Labour have indicated that they won't have an emergency Budget, but will ensure they allow time for an OBR forecast to be prepared to inform their tax and spending decision making. There's also been much commentary that the OBR forecast in the Autumn could show changed economic circumstances. If these are more difficult than anticipated, additional funding will be required if Labour (or any party coming to power) wish to achieve their manifesto objectives.
Given Labour have been clear that they won't introduce austerity measures to find savings in public spending beyond those already anticipated or increase debt for day to day spending commitments, The only other levers to increase Government revenues are to grow the economy (which itself takes time) or raise taxes. Having ruled out increases in the main three revenue raising taxes (income tax, national insurance, and VAT) alongside the headline rate of corporation tax, this brings into focus those taxes not specifically protected, such as CGT.
Even if the OBR forecast doesn't necessitate additional tax-raising measures, I have already highlighted the likelihood of tax reform in the medium term, with CGT being a key focus area.
When would any CGT changes come into effect?
It isn't inevitable if Labour were to win the election that there would be a change in CGT rates. I believe this policy choice will only be on the table if it's seen as necessary in light of the OBR forecast. If there were a change then based on when tax rate changes have been introduced historically, the key dates would be either:
the day of the fiscal event
As an OBR forecast is typically anticipated to take 10 weeks to prepare, this is likely to be no sooner than September or October 2024. It wouldn't be unprecedented for any rate change to apply from this date, 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.
What should businesses owners and investors be thinking about?
Irrespective of what happens after the General Election, now is the right time to review your overall tax strategy.
Business owners and investors should consider how the various party positions might impact them and their future plans, particularly where a sale is on the horizon, and for those considering succession planning, how they can navigate the future uncertainty.
For more insight and guidance, get in touch with Dan Hartland.
As we approach the General Election, find out more about the tax policies in the main political parties' manifestos.
Labour tax pledges: An examination of their manifesto
