The Government has announced plans to increase capital gains tax (CGT) rates.
The tax is paid on the profits when an asset is sold. Basic rate taxpayers currently face a 10% CGT rate, or 18% on residential property. Higher earners pay 20% on any amount above the basic tax rate and 24% on residential property.
Today, Chancellor Rachel Reeves announced that the lower rate of tax will rise from 10% to 18% and the higher rate from 20% to 24%.
In addition, the government will increase Capital Gains Tax rates on carried interest, a form of performance-related reward received by fund managers, from 28% to 32%.
The rates of CGT on residential property, including on buy-to-let and second homes, will be maintained at 18% and 24%.
Reeves also confirmed that Private Residence Relief, which means that main residential properties are exempt from capital gains tax, will be maintained.
Rachael Griffin, tax and financial planning expert at Quilter, said: "The government’s decision to immediately raise the taxable rates of Capital Gains Tax to 18% for the basic rate and 24% for the higher rate will have significant repercussions for a wide range of investors, primarily those holding shares. That said, CGT is paid by only 350,000 people per year equating to 0.65% of the adult population. Therefore, this will not be a change that is felt throughout the nation. But while this move is aimed at boosting revenue, is likely to have the opposite effect, as it discourages investment and leads to reduced economic activity across key sectors.
"One key problem with raising CGT is that it doesn’t necessarily guarantee more tax revenue. In statistics produced by the government which model the revenue impact of certain policies this is laid bare. For example, in the analysis it found that a 10 percentage point increase in the higher Capital Gains Tax rate shows a significant negative impact, reducing revenue by £400 million in 2025-26, £985 million in 2026-27, and £2.25 billion in 2027-28. This is because higher CGT rates often result in fewer people selling their assets, as they choose to sit on them to avoid triggering the tax. This has the effect of locking wealth into certain asset classes, reducing the flow of capital into the economy. This behavioural shift could undermine the government’s revenue-raising objectives, as fewer transactions mean less CGT collected overall.
"However, opting to increase CGT rates but not so much as to align them with income tax rates is perhaps an attempt by the government to at least partially alleviate the issue of people sitting tight.
"The changes today will impact on traditional financial planning techniques. Over the past few years, changes to the CGT landscape such as the significant reduction in the Annual Exempt Amount coupled with cuts to the dividend allowance have drained the life out of General Investment Accounts and made ISAs, due to their tax efficiency, even more important for all. Similarly, for those looking for simplicity in their tax reporting, onshore bonds have once again become a more useful 'tax wrapper'. In addition, higher rate and additional rate taxpayers may use an onshore bond to help shield income yields and investment gains from higher personal rates of tax on an arising basis."
Nigel Green, CEO of deVere Group, commented: “Capital Gains Tax is due on profits made from the sale of assets such as investment portfolios, property, and businesses. Traditionally, it’s been seen as a levy on the wealthiest, but the reality is that many everyday workers will be dragged into paying higher taxes.
“As the government aims to raise up to £35bn, this increase will come at the expense of hardworking people who have prudently saved for their futures.
“Ordinary middle-class families, entrepreneurs, and even expatriates will be severely impacted by this CGT hike. People who have responsibly planned for their retirement, invested in property, or run successful businesses are set to be penalised for making sound financial decisions.
“The proposed changes will have a chilling effect on investments. When people face higher tax bills on their returns, they’ll think twice before investing in property, pensions, or businesses.
“At a time when the UK economy desperately needs fresh investment to recover from recent economic headwinds, discouraging people from putting their money into growth-generating ventures is short-sighted and harmful.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, added: “The change is a blow for investors. This could have been worse, with suggestions of a doubling of the rate, but it’s scant consolation for anyone hit with a bigger tax bill.
"This doesn’t just affect those who are hit with a far bigger bill, it also makes investment less attractive for newcomers who don’t want to have to get to grips with a new tax risk. Already far fewer people in the UK invest than elsewhere in the world, and this could compound the problem. For existing investors, there’s a danger this will drive investor behaviour, and people will focus on tax considerations, rather than the investments that make the most sense for their circumstances. There’s also a danger they may hoard the assets – possibly until their death.
It comes on top of the slashing of the tax-free allowance over the past couple of years from £12,300 a year in 2022/3 to just £3,000 in the current tax year. Investors also have to cope with the fact that frozen income tax thresholds have pushed more people into higher rate tax – automatically pushing up their capital gains tax rate. A combination of all these things means more people face paying more of this tax.
"Talking about things like capital gains tax as ‘wealth taxes’ obscures the fact that many people on average incomes, who’ve invested carefully throughout their lives, can face a tax bill when they rebalance their portfolio or sell up to cover their costs later in life. The annual allowance of £3,000 doesn’t stretch particularly far when you’re selling an investment you’ve held for 30 years or more, so investors should consider how to protect themselves."
However, Gilbert Verdian, CEO and founder at Quant, disagreed, saying: “The imagined ‘mass entrepreneur exodus’ makes for a good headline, but it is more rhetoric than reality. There are many, many more of us entrepreneurs who are committed to staying put and paying our fair share. Nowhere else can match London when it comes to talent, capital raising, and stable regulation. These advantages have been built up over centuries of competitiveness and innovation and – regardless of tax tweaks – are here to stay.
“It may be painful in the short-term, but this is the budget we need to have. We need to remember that in the long run, this will increase government investment in large infrastructure projects and public services, boosting the health of the whole economy. Ultimately, the Budget can be seen as a catalyst for future growth.”
