CGT – Exemption to Fall Next Year

Capital gains tax is a form of tax charged on profits made from selling certain assets, such as second homes or investments. In recent months, this tax has received attention due to the Prime Minister’s tax return, which showed significant profits and a lower tax rate on capital gains. Now, there are proposals to reduce the annual capital gains tax exemption in the coming years. In this article, we will explore what capital gains tax is, who it applies to, and the potential implications of these proposed changes for individuals in the UK.

Understanding Capital Gains Tax:
Capital gains tax is a tax individuals must pay on the profits they make from selling assets. These assets can include second homes, shares, and certain investments. It is important to note that not all assets trigger capital gains tax liabilities. For example, assets like wines, watches, and classic cars are exempt from this tax.

The tax rate for capital gains depends on an individual’s income tax rate. Basic rate taxpayers, who pay 20% on their income, will face a capital gains tax rate of 10%. Higher and additional rate taxpayers, who pay 40% and 45% on their income respectively, are taxed at a rate of 20% on non-property capital gains. Capital gains on the sale of residential property, excluding the family home if it is covered fully by the main residence exemption, are taxed at a rate of 18% and 28%, depending on the individual’s income tax band.

Proposed Changes to the Capital Gains Tax Exemption:
Currently, individuals can make up to £12,300 in profits on the sale of assets annually without having to pay capital gains tax. However, starting from 6 April 2023, this exemption will be reduced to £6,000. This reduction in the exemption will further decrease to just £3,000 from 6 April 2024.

Implications of the Proposed Changes:
These proposed changes to the annual capital gains tax exemption will affect individuals who make profits on the sale of assets. Previously, individuals could make up to £12,300 in profits each year without being subject to capital gains tax. However, with the exemption reducing to £6,000 and eventually £3,000, more individuals may find themselves liable to pay tax on their gains.

Potential Revenue Generation for the Government:
Capital gains tax is a valuable source of revenue for the UK government. In the 2020-21 tax year alone, it generated £14.3 billion, and this figure is expected to rise to £18 billion by 2028. With mounting pressure on the public purse, it is not surprising that further reforms to capital gains tax are being proposed.

Alignment with Income Tax:
Three years ago, the Office for Tax Simplification (OTS) recommended aligning capital gains tax and income tax rates. However, this recommendation was not adopted at the time, and the OTS has since been disbanded. Although neither the Conservative Party nor the Labour Party has explicitly stated plans to increase capital gains tax rates, it cannot be ruled out. Such a move could target a relatively small number of wealthier individuals.

Capital gains tax is a tax individuals must pay on the profits they make from selling certain assets. The proposed changes to the annual capital gains tax exemption, reducing it from £12,300 to £6,000 in 2023 and eventually to £3,000 in 2024, could have implications for individuals making gains on the sale of assets. It is important for individuals to understand these changes and consider their potential tax liability. With capital gains tax generating significant revenue for the government, further reforms should not be unexpected.