Raising tax rates is a traditional government strategy to increase tax receipts for HMRC, but this may not be the case for capital gains tax (CGT). This is because taxpayers generally have more control over when gains are realised.
The upcoming Budget at the end of October is widely expected to see a hike in CGT rates. However, recently published data from HMRC suggests that the 4% higher rate reduction from 6 April 2024 (28% down to 24%) on residential property disposals may have helped to increase tax receipts as landlords could be taking a good opportunity to sell up.
For the five months to 31 August 2024, CGT receipts increased by nearly 10% compared to the year before.
Take care to plan ahead
Compared to landlords, those with an investment portfolio have more opportunity for CGT planning since they have considerable flexibility over the timing of disposals. However, there is now somewhat less scope for basic CGT planning with the annual exempt amount cut to just £3,000:
- With an investment portfolio, disposals can be spread over several years to make use of multiple annual exempt amounts and basic rate tax bands. Couples can also make use of the annual exempt amounts and basic rate tax bands of a spouse or civil partner. Such strategies should be used with care, however, as this type of planning will unravel if CGT rates increase in the future.
- Making personal pension contributions in the same year as a disposal will increase the basic rate tax band.
- More sophisticated investors might consider investing in a seed enterprise investment scheme. With 50% income tax relief and CGT exemption on 50% of a reinvested gain, a landlord could currently benefit from total tax relief of 64%. This relief will increase in line with any future uplift of CGT rates. These investments are high risk and advice should be taken before engaging in them.
Longer term, those with a large investment portfolio might be able to avoid any tax liability if they retire overseas. This option does not work for landlords because UK property remains subject to CGT regardless of the owner’s residence status. HMRC’s guide to capital gains tax (what you pay it on, rates and allowances) can be found here.