Do higher rates of CGT hurt the economy? And if rates do increase, what can be done by business owners?

With the October budget fast approaching and the pre-election Labour Manifesto being silent on the future of Capital Gains Tax (“CGT”), there is speculation that if not the rules, then at least the rates of CGT will change – with commentators unanimous in their predictions that rates will increase.

At first glance a rate increase would seem inevitable, especially given that the number of people who might directly pay CGT in any one tax year is a significantly lower than those affected by income tax or VAT.

However, we would suggest that any government should be cautious of increasing CGT rates given the potential for this to affect the entire UK population  – in particular a government which has made it a stated aim to “kickstart growth”.  

In a piece of proprietary, detailed analysis recently undertaken by MM&K*, we found that there is a correlation between increases in CGT rates and a decline in GDP.

As per the graph below, for every 1% increase in CGT (at its lowest rate for an individual), GDP decreased by £59b on average one year later (for reference, £59b is 1.4% of total GDP in 2023).

In addition, there also appears to be a strong correlation between increases in CGT and decreases in Gross Household Savings (GHS) – with savings levels seeming to decrease by £2.9Bn for every 1% increase in the lowest rate of CGT.

Whilst correlation is not the same as causation, we would hope that the Government has used the pre-budget period to commission its own studies to show the potential wider economic issues at play.  Given that the UK economy is now 80% the service sector and the UK the recipient of the 15th highest flow of foreign direct investment, anything that might jeopardise this eco-system should be approached with caution and, perhaps, some patience.

However, should they still decide to press on with changes to the rate, what could business businesses owners do as a reaction to this?

Firstly, it is important that any owner establishes the context in which any transaction would take place. For those already in the later stages of divesting their asset, it may be sensible to ensure that transactions complete prior to the budget on 30 October (in order to get certainty of treatment).

For those in earlier transaction stages, whilst timelines could be truncated, vendors will need to cautious that purchasers do not take advantage with a price chip (which may work out meaning the net position is worse for the vendors than if they had waited and dealt with the new rate).

In terms of what that new rate will be, it is interesting to note that there does not appear to have been any “pre-briefing” around aligning CGT and income tax rates.  Whilst this position cannot be ruled out, the lack of conversation around it would lead us to suspect that if the CGT rate does increase, it will not reach the levels of income tax.

From a messaging perspective, the simplest thing to do might be to make all assets subject to the current 28% rate which exists and currently only applies to residential property (not qualifying for private residence relief) and Carried Interest.

Alternatively, all assets might go to a slightly higher rate.  As we discussed in a previous article (click here), we would estimate that the likely top level of CGT (if not being raised to match income tax) would be in the region of 30% – 32%.

An interesting aspect of the upcoming budget is whether rates will change from the date of the Budget or from the following tax year.  A delay to April 2025 would give a five month window in which a number of transactions would likely occur – giving an immediate boost to the economy.

Finally, we would note that, even if CGT rates do increase, there are still significant savings available through capital assets not being subject to National Insurance contributions.  From a long term remuneration perspective, we would therefore encourage clients to consider whether EMI is available and/or whether other forms of tax-advantaged equity arrangements might be appropriate. For more information visit our Share Plan Fact Sheets.

Should you want to know more or want someone to help you explore your thinking on this, please contact Stuart James (stuart.james@mm-k.com) in the first instance.

* – for anyone interested in finding out more about the detailed analysis we undertook, please contact James Sharp james.sharp@mm-k.com or click on the link here (Does Capital Gains Tax hurt the economy?) to read the paper itself.

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