Few taxes attract as much speculation before a Budget as Capital Gains Tax (CGT).
While it raises far less revenue than Income Tax or VAT, CGT is often seen as a lever the Treasury could pull to generate quick funds and it comes with behavioural quirks that make it particularly unpredictable.
As it is a tax on gains for individuals, it is seen as an easier political target as well, which is why we have previously seen changes to a number of connected reliefs, including Business Asset Disposal Relief.
How CGT changes affect behaviour
HM Revenue & Customs (HMRC) research has long shown that when a steep rise in CGT rates is announced, taxpayers rush to sell assets before the new rate takes effect.
This creates a short-term spike in revenue as gains are “crystallised.”
However, once the higher rate is in place, the opposite effect occurs taxpayers simply hold on to assets, waiting for a future change of policy, and tax receipts fall back.
In other words, a sharp increase risks a one-off windfall followed by years of reduced activity.
By contrast, modest increases in CGT, say one or two percentage points, create the same effect but without paralysing the market.
Research suggests successive small rises could steadily raise billions more over time, as taxpayers adjust to the higher rate without being put off selling altogether.
The tax impact
If the Chancellor opted for a medium-scale reform of CGT, the consequences could include:
- Higher liabilities for investors and landlords when selling shares, second homes, or buy-to-let properties.
- More taxpayers dragged into CGT as the annual exemption (currently £3,000) remains frozen, while rates climb.
- Timing pressures on disposals, with a rush of sales before changes are introduced.
Who would be most affected?
- Landlords and second homeowners – Whose sales of additional properties, outside of the main residence relief, often trigger large gains.
- Investors – When selling shares and other assets and who rely on disposals for income.
- Executors of estates – Who may need to account for higher CGT liabilities when selling inherited assets.
A large, one-off hike in CGT would raise a short burst of revenue but discourage future sales, while a series of smaller increases could steadily boost the Treasury’s take.
Either way, taxpayers disposing of assets may soon face a higher tax bill and timing could be everything.
We will be watching this space carefully and giving further advice if the speculation proves to be accurate.