What you need to know about the budget changes and Capital Gains Tax

In October 2024, Chancellor Rachel Reeves presented the UK's Autumn Budget, introducing significant tax reforms aimed at bolstering public finances and enhancing public services. Among these changes, Capital Gains Tax (CGT) underwent notable adjustments affecting investors and entrepreneurs.

Increased CGT Rates

Effective from 30 October 2024, the main CGT rates saw a substantial rise:

• The lower rate increased from 10% to 18%.
• The higher rate rose from 20% to 24%.

These changes impact individuals disposing of assets, resulting in higher tax liabilities on their gains.

Residential Property CGT Rates Unchanged

It's important to note that CGT rates for residential property disposals remained unchanged:

• 18% for basic-rate taxpayers.
• 24% for higher and additional-rate taxpayers.

This consistency provides some stability for property investors amidst broader tax changes. These rates had been expected to increase so it will be a relief to those affected that they did not.

Don’t forget!

The 60-day Capital Gains Tax (CGT) reporting requirement in the UK refers to a rule where individuals must report and pay any CGT due on the sale of UK residential property within 60 days of the completion date. This rule applies to disposals of properties that are not their primary residence or that do not qualify for full private residence relief.

Key Points:

1. Who it applies to: This rule affects individuals, trustees, or personal representatives selling UK residential properties, where CGT is due.
2. Timeframe: You must report the sale and pay any CGT owed within 60 days of the property’s completion date (the day ownership is transferred).
3. How to report: The report is made online through HMRC’s "Capital Gains Tax on UK property" service. A paper return may be used where a taxpayer is “digitally excluded”. If the individual is also required to complete an annual Self Assessment Tax Return then a summary of the disposal, and tax already paid, will need to also be included on that return.
4. Payment of CGT: The tax owed is also payable within the 60-day window. HMRC will provide a special tax payment reference for this purpose.
5. Penalties: Failure to report and pay on time can result in penalties and interest charges.

We can assist with CGT calculations and advice, CGT Return filing and completion of Self Assessment Tax Returns.

Adjustments to Business Asset Reliefs

The Budget also introduced modifications to reliefs associated with business assets:

• Business Asset Disposal Relief (BADR) and Investors’ Relief (IR):
  • The CGT rate for qualifying disposals will increase from 10% to 14% starting from 6 April 2025
  • This rate will further rise to 18% from 6 April 2026
  • There is a lifetime limit of £1 million of qualifying gains that can benefit from BADR, the balance of any gains is taxable at the rates above.
  • Additionally, the Investors’ Relief lifetime limit is reduced from £10 million to £1 million for qualifying disposals made on or after 30 October 2024.

It is advisable for individuals and businesses who think they may be affected by these changes to consult with tax professionals to understand the full implications and to plan accordingly.

Also important to note if you are thinking of making gifts as part of estate planning

When you gift an asset, such as a residential property, to a connected person, such as a family member, there are specific CGT and Inheritance Tax (IHT) consequences to consider.

Capital Gains Tax (CGT):

• Gifts to Connected Persons: Gifts to connected persons (e.g., children, parents, siblings or business partners) are treated as disposals for CGT purposes.
• Market Value Rule: Instead of being taxed on the actual sale price (which might be zero in the case of a gift), the gift is treated as if it were sold at its market value. This means the donor may have to pay CGT on any capital gain from the value at the time of acquisition to the market value at the time of the gift.
• No Immediate CGT for the Recipient: The recipient does not pay CGT when receiving the gift, but they may be liable for CGT when they sell the asset in the future. Their base cost for CGT purposes is the market value on which the donor pays tax on unless gift holdover relief (see below) is claimed.
• If the gift is of UK residential property then the 60 day reporting requirements mentioned above may apply.

Gift holdover relief:

Gift Holdover Relief is a tax relief available that allows individuals, and trustees in some circumstances, to defer the payment of CGT when they make gifts of certain assets, or transfers out of trust, to individuals or a qualifying trust. The relief is particularly useful for individuals who wish to transfer business assets, or gifts into trust which are classed as chargeable lifetime transfers, while reducing their immediate tax liabilities. This relief defers CGT on the gifted assets until the recipient disposes of them, allowing for more flexible tax planning and no upfront CGT cost when there may not be funds available to pay the CGT. A claim for the relief is usually required by both parties and there are certain processes to follow in order to do so.

Inheritance Tax (IHT):

• Potentially Exempt Transfers (PETs): Gifts to connected persons can also trigger Inheritance Tax if the donor dies within 7 years of the gift. The gift is considered a potentially exempt transfer (PET), and if the donor survives 7 years, it is outside of their estate for IHT purposes.
• Taper Relief: If the donor dies between 3 and 7 years after making the gift, taper relief reduces the IHT due on the gift depending on how long the donor survived after making the gift. Note however it is the IHT that is reduced and not the value of the gift. If the value of the gift falls within any available Nil Rate Band or Transferrable Nil Rate Band of the donor then IHT will not usually apply and therefore neither will taper relief.
• Exemptions: Some gifts, such as those made to spouses or civil partners or charity, may be exempt from IHT, regardless of when the donor dies.
• Insurance: It may be possible to take out life insurance to cover any potential IHT impact of making a PET which becomes chargeable if the donor dies within 7 years. The insurance would be subject to acceptance and costs vary based on age and health but can be an effective planning tool and can be written under trust so that an payout does not form part of the donor’s estate.

How can Hegarty help?

Gifting to a connected person can trigger both CGT and IHT consequences, including the application of the market value rule for CGT and the possibility of IHT if the donor dies within 7 years. It also gives opportunities to make use of trusts and gift holdover relief to reduce the upfront tax cost, however, it all depends on the circumstances.

It’s important to consult with an experienced tax advisor when making significant gifts to ensure proper planning. For advice you can count on...Think Hegarty.