A comprehensive Capital Gains Tax (CGT) overview

Capital Gains Tax (CGT) has long been a key component of the UK tax system, impacting individuals and businesses alike. With ongoing fiscal pressures and the Labour Government’s need to find new revenue streams, CGT has been a frequent topic of discussion. In light of the changes announced in the Autumn Budget, this article provides a general overview of CGT, its historical evolution, the most recent CGT developments and what taxpayers can do to potentially mitigate their CGT bill.

What Is CGT?

CGT is a tax on the profit made when you sell or dispose of an asset that has increased in value. It applies to everything from property and shares to personal possessions, although certain exemptions and reliefs can apply. CGT is charged on the gain made, rather than the sale price. Previously, the rates varied depending on the taxpayers band and whether the asset was residential property of other investments. However, following the announcement the rates have been aligned.

How will the Autumn Budget impact CGT?

With ongoing media coverage occurring prior to the Budget, many were wondering if the Chancellor’s announcement would introduce significant CGT changes, particularly as the UK navigates the post Covid-19 and Brexit fiscal challenges.

The CGT announcement presents more favourable news to some, notably those disposing of residential property, while presenting less advantageous outcomes for others. The proposed revision has increased the CGT rate for basic and higher rate tax payers, effective from 30 October 2024. The outcomes from the Budget will also see the rate of Business Asset Disposal Relief (BADR) and Investor’s Relief increase in 2025, and again in 2026. You can read more about the new rates below.

A historical overview of CGT (1965-present)

CGT was introduced in 1965 by the then Labour Government as a means to prevent taxpayers from converting income into capital gains, which were historically untaxed. Since its introduction, CGT has seen several major overhauls:

• Between 1988 and 2008, CGT was aligned with individual income tax rates. Gains were taxed at the taxpayer’s marginal rate, which could be as high as 40%.
• In 2008, the Labour Government simplified the system, introducing a flat rate of 18% on all gains. They also introduced Entrepreneur’s Relief (now known as Business Asset Disposal Relief), a relief that applied a lower rate of 10% on some gains made by business owners and shareholders.
• In 2016, the Conservative Government saw that rates were reduced to 10% for basic-rate taxpayers and 20% for higher-rate taxpayers, with property gains taxed at higher rates (18% and 28%).
• In 2024, as part of the Labour Government’s attempts for national renewal, it was announced that the rates for basic and higher rate taxpayers would increase, in addition to the increase in rates for personal representatives and trustees.

These changes reflect the Government’s broader goals over time—sometimes focusing on incentivising investment, while at other times, increasing revenue.

Recent changes to the CGT regime

More recently, CGT reforms have focused on tightening reliefs and accelerating tax payments. Notable changes include:

• Principal Private Residence (PPR) Relief: The Government reduced the periods for which relief is available on main residence disposals. Lettings relief is now only available if the owner is living in the property at the same time as the tenant.
• Entrepreneurs’ Relief to Business Asset Disposal Relief: In 2020, the lifetime limit for this relief was slashed from £10 million to £1 million, capping the gains eligible for the reduced 10% CGT rate. At this time, the relief was renamed Business Asset Disposal Relief (BADR).
• 60-Day reporting for property disposals: Since 2021, taxpayers have been required to report residential property sales and pay any resulting CGT within 60 days of the sale, significantly reducing the time available to settle tax liabilities.

CGT under the current regime

Following the recent changes announced in the Autumn Budget, CGT rates have increased for disposals made on or after 30 October 2024. Legislation introduced in Finance Bill 2024-25 will amend sections 1H and 1I of the Taxation of Chargeable Gains Act 1992 as follows:

• The 10% rate for basic-rate taxpayers will rise to 18%.
• The 20% rate for higher-rate taxpayers will increase to 24%.
• The 20% CGT rate for gains accruing to trustees and personal representatives will also increase to 24%.

For Business Asset Disposal Relief and Investors’ Relief, the rate will increase from 10% to 14% for disposals made on or after 6 April 2025, and then from 14% to 18% for disposals on or after 6 April 2026. However, the existing 18% and 24% rates for residential property will remain unchanged.

The lower rates on capital gains, relative to income, in addition to the increasing financial ‘black hole’ have long fuelled speculation about potential CGT rate increases, which these changes partially address.

What do these changes mean for taxpayers?

With the increases in CGT rates effective immediately, strategies to reduce exposure to CGT have become more limited, however several approaches could be considered to help minimise liabilities. Taxpayers can make the most of annual exemptions, which allow gains up to the tax-free allowance (currently £3k per individual).

For married couples and civil partners, transferring ownership of assets before disposal potentially reduces the total CGT exposure. Businesses contemplating a sale should also consider timing carefully, as the BADR rate is set to rise from 10% to 14% in April 2025, with a further increase to 18% in 2026. Selling before these increases take effect could result in CGT savings.