New government? New strategy for capital gains tax?

We are aware that the election has created huge uncertainty for our clients on tax matters and, for those with investments, capital gains tax (CGT) is a particular concern.

We cannot second guess what a future Labour government will do, should they be elected on 4 July; neither can we advise on whether to sell any specific investment. However, we can look at what’s been said and written to gain a sense of where fiscal policy might head and look at some strategies for dealing with the uncertainty.

What Labour has said

The Labour manifesto is light on detail but commits to not raising income tax, VAT or national insurance. These are the three biggest revenue generators, so it begs the question as to where funds will come from for any increased public spending. The manifesto sets out revenue raising measures including a significant £5bn chunk from reducing tax avoidance, but it’s likely that more will be needed.

With major taxes protected, CGT is potentially a target. In early June, Rachel Reeves said she had ‘no plans’ to raise CGT, but that falls short of a commitment and has largely served to fuel speculation that she may well do so.

Labour has already appointed a panel of tax experts to assist and advise. They include Edward Troup, former director at HM Treasury, ex First Permanent Secretary at HMRC and adviser to Kenneth Clarke in the 1990s. Troup is on record as wanting to increase taxes for the baby boomer generation, saying that today’s pensioners have it ‘ridiculously good’. A CGT hike could be part of his playbook.

How and when might a CGT rise happen?

Any CGT hike that is introduced will, inevitably, be done at short notice to prevent people from making pre-emptive sales to avoid the higher rates. CGT is driven by the date of the transaction, so it’s perfectly possible to change the rates mid-year.

In theory, it would therefore be possible for Rachel Reeves to introduce a CGT increase almost as soon as she takes office. The incoming 2010 Conservative government was elected on 6 May and George Osborne raised the CGT rate on 23 June. However, an immediate hike would require a very swift 180 degree turn from Ms Reeves on ‘no plans’ to raise CGT. She has also said that she wants to give the Office of Budget Responsibility ten weeks to review her plans, so any Budget event could not be before mid-September.

Should I take action now?

At present, any assets held at death are inherited at market value for CGT purposes. While wholesale reform of CGT, including this feature, is not impossible, it seems unlikely without consultation. Thus, if you have an asset which you are likely to hold all your life and which is standing at a gain, then it could make sense to do nothing.

CGT is triggered when the owner loses beneficial ownership of the asset. This can occur before the sale is completed. Thus, if you are in the process of disposing of a property, the trigger date for CGT is the exchange of contracts rather than completion. It follows that if you are part way through a sale, it would be sensible to proceed to exchange as soon as possible.

If you have an unrealised capital gain on an asset you are likely to realise before death, then the options involve triggering a CGT disposal in order to ensure that the gain is taxed at current rates. There are a number of ways to do this.

The most straightforward route would be a sale. For liquid assets – stocks, shares, etc. – this is quick and easy. It is less so for real estate assets. The decision to sell requires consideration of whether the risk of paying tax at higher rates under a new tax regime outweighs the benefit of paying tax in the future (essentially the time value of money) plus transaction costs and reinvestment risks. The lower the transaction costs and time value the greater the incentive to sell now.

So, if you intended to sell a liquid portfolio of equities in six months, the transaction costs are low and, in fact, the capital gain would still fall into the 2024/25 tax year. Your tax would therefore still fall due on 31 January 2026 and the time value would be nil. In those circumstances it might be wise to sell now. However, for an investment property which you had no immediate plan or need to sell, the tax would fall due within 60 days of completion and the transaction and reinvestment costs are high (legal fees, stamp duty, etc.), so holding on may make more sense.

Selling is not the only way to create a CGT disposal. A gift can be completed quickly and is also treated as a disposal, with the donee acquiring the asset at market value for future CGT purposes. The gain is taxed even though you have received no proceeds from the transaction. The tax is still payable in the normal way, and so you would need to ensure that you understood the market value of the asset and had the liquid funds to meet the tax liability.

Similarly, a gift into trust could create a CGT disposal, so that trustees acquire the asset at market value, effectively rebasing it for CGT purposes. There are other tax implications involved in establishing a trust which need to be weighed up carefully.

Inevitably the uncertainty makes it difficult to plan. Beyond the immediate thought process set out above, the doubt over the future of CGT reinforces our view that holding investments within a diverse range of structures will offer the best protection. If you hold assets in an ISA, pension, investment bond and general investment account as well as rental property, then a change to the taxation of one pot should not materially impact the whole financial plan.

Ultimately, anyone taking action to try to accelerate gains and avoid CGT increases should think about whether disposals make sense commercially as well as for tax purposes. The old maxim about tax tails wagging commercial dogs is probably over-used, but makes even more sense when the tax tail in question is speculative.

Clare Munro is our Senior Tax Advisor. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.

Important information

Tax laws are subject to change and taxation will vary depending on individual circumstances.