Rachel Reeves announced that the rate of capital gains tax (CGT) will increase in the first Budget that she delivered as Chancellor of the Exchequer. It had been widely expected that CGT would be reformed to create extra tax revenue for the Treasury. In this article, we explain how CGT has changed, as well as how it works and how it may affect you.
What are the changes to capital gains tax?
After many weeks of speculation that the government would look for ways to increase the amount that is raised through capital gains tax, today's announcement confirmed this as CGT rates were increased. The Chancellor announced that the increased rates would come into effect immediately with other changes taking effect over the coming years.
The rate at which CGT is charged when a liable gain is made has increased from 10% for a basic rate taxpayer and 20% for a higher rate taxpayer to 18% and 24%, respectively. This change is effective immediately and applies to any gains that are realised from the 30th of October 2024.
Although Reeves' changes reflected a more significant increase for basic rate taxpayers, the rates are now the same regardless of whether the gain was made through the sale of residential property or any other type of asset.
What is the rate of capital gains tax before and after the Budget?
Basic-rate taxpayer CGT
| Type of Gain | CGT payable prior to the Budget | New CGT payable |
| Residential property^ | 18% | 18% |
| All other chargeable assets (including investments) | 10% | 18% |
^ except where this is your main residence
Higher/Additional-rate taxpayer CGT
| Type of Gain | CGT payable prior to the Budget | New CGT payable |
| Residential property^ | 24% | 24% |
| All other chargeable assets (including investments) | 20% | 24% |
^ except where this is your main residence
What is capital gains tax?
Capital gains tax is the tax levied on any gain you make when you sell or dispose of assets - the gain can be described as the profit you made over the period of time that you owned the asset. This means that the asset was sold or disposed of at a higher value than it was acquired. Capital gains tax is paid on the difference between the original cost of the asset and its value when it was disposed of.
How does capital gains tax work?
Capital gains tax (CGT) is paid to HMRC by the owner of any asset when they sell it or dispose of it - disposing of an asset can include selling it, gifting it to someone else, swapping it for something other than money or receiving compensation in return for the asset.
You are not required to pay capital gains where the gain is:
- Less than £3,000 - a tax-free allowance of £3,000 (£1,500 for trusts) applies to any gains you make in the financial year 2024/25; the threshold was £6,000 in the year 2023/24 and £12,300 in previous years.
- From the sale of your main residence - no CGT is applicable unless your residence was let out, used as business premises, exceeds 5,000 square metres and was not bought just to make a gain.
- From ISAs, personal equity plans (PEPs), UK government gilts and Premium Bonds
- From lottery, betting or pools winnings
If you acquire losses as well as gains from the sale or disposal of assets over the course of a financial year, you will only pay capital gains tax on the net value of these which means that in some cases you may not pay capital gains tax if the net gain you make falls below the tax-free allowance.
Capital gains tax - example calculation
So, for example, if you were to sell a piece of art at a profit of £10,000 and, in the same financial year, sell shares resulting in a loss of £2,000, then the overall gain you made would be £8,000. In order to calculate your capital gains tax bill, you would then subtract the tax-free allowance (£3,000) from this amount, leaving you with £5,000 - this is the amount that you would pay capital gains tax on. A basic rate taxpayer would have to pay 18% of £5,000, which would be £900, and a higher rate taxpayer would pay 24% of £5,000, which would be £1,200.
How will the increase in CGT affect you?
If you sell or dispose of assets then you will have to declare any resulting gains to HMRC for tax purposes. All gains that were realised fully before midnight on the 29th of October 2024 in this financial year will be subject to pre-budget rates of CGT. As rates have not increased for gains made on the sale of a residential property, then the rate at which you will pay CGT on your gain will also be the same as it would have been prior to the Budget announcement.
However, any gains that materialise from the disposal of assets (not residential properties) will be subject to the increased rates that were announced in the Budget. The increased rates mean that both basic-rate and higher-rate taxpayers can expect their capital gains tax bill to increase.
Tax partner at PwC, Alex Henderson, commented, "The Chancellor did not increase CGT and IHT as much as some had feared, however while not exactly a win, there were definitely losers."
Other changes to capital gains tax
Business Asset Disposal Relief (BADR) allows businesses to access reduced rates of CGT. Effectively, the relief means that businesses and investors are able to pay the lower rate of CGT (previously 10%) on gains from the sale of business assets as long as they meet specific qualifying rules. Although the lower rate will increase from 10% to 18% for individuals, businesses will continue to be charged 10% until April 2025 when the rate will increase to 14% - the rate will increase to 18% to fall in line with individuals paying basic rate tax from April 2026. This phased increase to the lower rate of capital gains tax payable by businesses will allow them time to allow for increased charges within their planning. The lifetime allowance for BADR remains unchanged at £1m.
Investors’ Relief (IR) applies to gains made through the sale of shares in non-listed companies such as Alternative Investment Market (AIM) shares. Prior to this Labour Budget, gains from the disposal of these shares would attract the lower rate of 10% capital gains tax but this rate will increase to 14% from April 2025 and then to 18% by April 2026. The lifetime allowance for IR has been reduced from £10m to £1m from 30th October 2024.
Besides the changes to the rate of capital gains tax that is applied, the Chancellor also made some changes to the way that carried interest is taxed. Individuals who provide investment management services to investment funds and receive sums of carried interest on which they pay CGT will see the current rate of 28% increase to 32% from April 2025. From April 2026, carried interest will be treated within the rules of tax applied to earned income. During her budget speech, Rachel Reeves pointed out that these reforms would make taxing of carried interest, "simpler, fairer and better-targeted".
