Update 30 October 2024 – Following the Budget announcement today, some of the details mentioned in this insight may have changed. Please visit our Budget page for further information.
Capital gains tax is charged on the profits made from selling certain assets, such as a second home. Since 6 April 2023, the annual capital gains tax exemption has been more than halved, with a further reduction in April 2024.
The Prime Minister’s tax return, published in March, has put capital gains tax once again under the spotlight. Including his prime ministerial salary, Rishi Sunak earnt in £1.9m in the last tax year (2021-22) paying just over £432,000 in tax thanks to significant profits made on the sale of unnamed assets and the lower tax rates applied to capital gains.
There is, of course, no question that the Prime Minister has taken advantage of the capital tax regime, but it has raised questions over the fairness of the tax.
Broadly, capital gains tax will see individuals pay tax on the profits following the sale of certain assets. This will include, for example, the sale of second homes (the main home is excluded provided it has been your main residence throughout the period of ownership), shares and certain investments. Not all assets will trigger capital gains liabilities, with wines, watches and classic cars notable examples.
A basic rate taxpayer, paying 20% tax on income, faces a capital gains tax rate of 10%. Higher and additional rate taxpayers, paying 40% and 45% tax on income respectively, are taxed at 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 18% and 28% to the extent that they fall within the basic rate or higher and additional rate bands after considering taxable income for the year.
Since 6th April 2020, individuals have been able to make £12,300 of profits on the sale of assets without having to pay capital gains tax. That will fall to £6,000 from 6 April 2023, and to just £3,000 in 2024.
It is a valuable tax for the Government, generating £14.3bn in 2020-21 tax year and expecting to increase to £18bn by 2028. And with the pressures on the public purse squeezed further reforms should not be a surprise.
Three years ago, the Office for Tax Simplification (OTS) called for capital gains tax and income tax to be aligned. It was not adopted, and the OTS has since been disbanded. Neither the Conservative Party or the Labour Party has said it will increase capital gains tax rates, it should not be ruled out, targeting a relatively small number of broadly wealthier individuals.
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