CAPITAL GAINS TAX – IMPACT OF RECENT CHANGES AND POSSIBLE REFORMS

The significant reductions to the annual exempt amount in recent years mean that an ever-increasing number of individuals are now liable to capital gains tax (CGT).

Taxable gains often arise through routine portfolio management, such as rebalancing a general investment account or selling assets to generate cash for pension or Individual Savings Account (ISA) contributions. While the gain on any individual sale may not be significant, once the total gains in a tax year exceed the annual exemption, any tax due must be reported and paid—typically as part of the investor’s annual self-assessment.

Government figures ⁽¹⁾ reveal the impact of reducing the main annual exemption from £12,300 to £6,000, which brought an additional 87,000 taxpayers into the scope of CGT. When data for 2024/25 is available, a much larger increase is likely, given that the annual exemption was further reduced to £3,000 on 6 April 2024.

The autumn 2024 budget increased the main CGT rates from 10% and 20% to 18% and 24%. It remains to be seen what effect these changes will have on total tax raised. With the next budget scheduled for 26 November 2025, there is growing speculation that CGT could again be targeted by the Chancellor.

However, raising CGT rates or reducing the allowance has unpredictable impacts on tax revenue. As only realised gains are taxed, CGT revenue is usually driven by investor sentiment. In 2023/24, despite a large increase in the number of taxpayers subject to CGT as a result of the reduced allowance, CGT revenue fell from £14.7bn (2022/23) to £12.1bn. This was the second consecutive year that CGT liabilities declined, following a peak of £17.0bn in 2021/22, which is generally attributed to asset price inflation during the pandemic. Arguably some mean reversion could be expected following such a unique event.

A similar pattern of behavioural change followed adjustments to Business Asset Disposal Relief (BADR). In March 2020, the BADR lifetime allowance was reduced from £10m to £1m. While the rates and allowances have remained the same since then, the number of taxpayers realising gains eligible for BADR fell from 48,000 in 2021/22 to 39,000 in 2023/24, with tax charged at BADR rates dropping from £1.2bn to £1.0bn⁽²⁾.

The ability for taxpayers to defer disposals presents challenges for governments trying to increase CGT revenue. This is compounded under the current system as older taxpayers are incentivised to avoid realising large gains that would otherwise be eliminated on death. Various policy measures could address this issue, such as taxing unrealised gains. This has close parralells with a wealth tax and during the life of the taxpayer, such a measure would be highly controversial and create considerable liquidity issues. The same liquidity issues arise on death with some executors being forced into disposing of assets to pay the CGT, potentially triggering additional taxable gains.

A more palatable alternative would be to remove the “rebasing” of costs on death. In this case, beneficiaries would calculate future CGT liabilities on inherited assets using the deceased’s original acquisition costs, not the market value at death (a no-gain, no-loss transfer). This proposal, put forward by the Resolution Foundation ahead of the Autumn 2024 Budget⁽³⁾, remains part of their recommendations for Autumn 2025 ⁽⁴⁾.

They also propose a “settling-up” charge on unrealised gains for individuals who move abroad. Under current regulations, provided the taxpayer does not fall foul of the temporary non-residence rules—which require the taxpayer remaining outside the UK for at least five complete tax years—individuals can realise gains while abroad and avoid UK CGT. The suggested reform would introduce a “deemed disposal on departure,” creating a tax charge on unrealised gains, with deferred payment options available to address liquidity.

Ahead of the next budget, expect to see a variety of proposals from think tanks, though the close ties between the Resolution Foundation and the current government may add weight to their suggestions.

Sources:

(1) Capital Gains Tax commentary – GOV.UK
(2) Capital Gains Tax statistics – GOV.UK,
(3) Revenue-and-Reform.pdf
(4) Call-of-duties.pdf Revenue-and-Reform.pdf

If you have any questions, please feel free to contact the Technical Services team.

All information is based on our understanding and interpretation of applicable law and regulation which is subject to change.

 

 

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