What is Capital Gains Tax?
UK Capital Gains Tax (CGT) is a tax on the profit (or ‘gain’) made when an individual or entity sells or disposes of an asset for more than its purchase price. This tax is applicable to various types of assets, for example property, stocks, and other investments, with specific exemptions and rates.
The key part in this is the ‘profit’ which is taxed. This is the difference between the value you paid for the asset, and the value at which you sell the asset, which is the gain. The monetary value of the gain is the amount that could be taxable.
For example, if you buy shares in BAE Systems for £10,000 and sell them after a few years for £20,000, this means you have made a gain of £10,000 - which could be taxable.
What are examples of chargeable assets?
- Most assets that generate a profit upon the sale
- Property that isn’t your main residence, e.g. second homes, investment properties, a buy to let
- Stocks and shares that are not an ISA
- Business Assets
- Any personal possessions that are worth more than £6,000 (excludes your car)
The Autumn Budget changes 2024
The Autumn Budget 2024 introduced several significant changes to Capital Gains Tax (CGT) in October 2024 that will impact both individuals and businesses:
The changes to CGT Rates
Main Rates:
- The lower rate of CGT for individuals (basic rate taxpayers) has increased from 10% to 18%.
- The higher rate of CGT for individuals has increased from 20% to 24%
What is now taxable?
[Example: Taken from the www.gov.uk website]
You make a gain on or after 30 October 2024. Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,600.
First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2024 to 2025 tax year the allowance is £3,000, which leaves £9,600 to pay tax on.
Add this to your taxable income. Because the combined amount of £29,600 is less than £37,700 (the basic rate band for the 2024 to 2025 tax year), you pay Capital Gains Tax at 18%.
This means you’ll pay £1,728 in Capital Gains Tax.
Trustees and Personal Representatives:
The CGT rate for trustees and personal representatives has increased from 20 to 24%
Example Scenario
Background:
- A trust holds an investment property
- The property was purchased for £200,000
- The property is sold for £300,000. (after 30 October 2024)
- The gain on the property is £100,000 (£300,000 - £200,000)
- Assume there are no allowable expenses or reliefs to simplify the example.
Calculation at the Previous CGT Rate (20%)
- Gain: £100,000
- CGT Rate: 20%
- Tax Liability: £100,000 * 20% = £20,000
Calculation at the New CGT Rate (24%)
- Gain: £100,000
- CGT Rate: 24%
- Tax Liability: £100,000 * 24% = £24,000
Impact of the Rate Increase
- Previous Tax Liability: £20,000
- New Tax Liability: £24,000
- Increase in Tax Liability: £24,000 - £20,000 = £4,000
Summary
With the increase in the CGT rate from 20% to 24%, the tax liability for the trustees or personal representatives in this example increases by £4,000. This highlights the importance of considering the impact of tax rate changes on the overall financial planning and management of
trust assets or estates.
Business Asset Disposal Relief (BADR) and Investors’ Relief (IR):
The rate for BADR and IR will increase from 10% to 14% for disposals made on or after 6 April 2025 and from 14% to 18% for disposals made after 6 April 2026
Not sure if the changes in Capital Gains Tax affect you?
Here are some key effects that increased CGT can have on individuals AND businesses in the UK:
Higher Tax Bills:
Individuals will face higher tax bills on capital gains due to the increased rates. This affects gains from the sale of assets such as shares, businesses, and other investments.
Residential Property:
The rates for residential property disposals remain unchanged at 18% and 24% which means no additional burden for property investors.
However, you should note that the change will take effect for disposals of all UK residential property made on or after 30 October 2024.
Impact on Estates and Trusts
For disposals made on or after 30 October 2024, the CGT rate for Trustees and personal representatives has increased to 24% for all gains, regardless of asset type.
Impact on Businesses
Increased Costs for Entrepreneurs:
Entrepreneurs selling their businesses will face higher CGT rates under BADR (Business Asset Disposal Relief), potentially reducing the net proceeds from business sales.
Investment Decisions:
The higher rates may influence investment decisions, as the increased tax burden could deter some from selling assets or reinvesting gains.
Impact on Business Sales and Exits
Higher Costs for Owners Selling Businesses:
Business owners looking to sell their business will face higher tax liabilities on the proceeds if CGT rates rise or allowances decrease. This could discourage some owners from selling or make the timing of sales more strategic.
Reduced Incentives for Startups and Entrepreneurs:
Entrepreneurs often view a future sale of their business as an exit strategy to realise gains. Increased CGT reduces the net gain on a sale, which can make entrepreneurship less attractive. This is especially true if Entrepreneur’s Relief (Business Asset Disposal Relief) becomes less advantageous or is subject to tighter restrictions.
Property and Investment Holding costs
Impact on Real Estate investments:
Businesses that invest in property will face higher taxes on gains if CGT on residential and commercial property increases. This could make property investment less appealing and impact the real estate market.
Less flexibility in Portfolio Management:
For businesses and investors holding shares or assets, higher CGT makes it more costly to realise gains and rebalance portfolios. This may lead to businesses holding onto assets longer than desired, potentially limiting liquidity and flexibility.
Reduced incentives for Employee Share Schemes
Many companies use share options and equity-based incentives to attract and retain key talent. Increased CGT would reduce the attractiveness of these incentives if employees were taxed more heavily when they sell shares in the company, which could impact recruitment and retention strategies.
For employees exercising options in growing startups, higher CGT might make equity compensation less appealing relative to cash bonuses or other forms of remuneration.
At Coles Miller, we understand the complexities and challenges that changes in Capital Gains Tax can bring for both businesses and individuals.
Our experienced team can provide expert advice and tailored strategies to help you navigate any potential impact on your business, investments, or property sales.
Whether you're an individual, group or company, we offer comprehensive tax planning and legal guidance to help you to minimise liabilities and maximise value.
Contact us today to discuss your options, ask any questions and secure the right financial outcomes for your business and future.
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