Slashed capital gains tax (CGT) thresholds have triggered a jump in the number of clients needing support with calculating CGT liabilities, according to new data published by tax specialists Financial Software Limited (FSL). This comes as speculation mounts about tax thresholds being cut further in the upcoming budget.
Through research carried out by the lang cat, advisers reported that, on average, 18% of their clients were impacted by the tax in 2022/23. This more than doubled to 37% in the 2024/25 tax year. The annual exemption amount for CGT fell from £12,300 in 2022/23 to just £3,000 in 2024/25, bringing in an additional 87,000 taxpayers into the scope of the tax.
Over the same period, one in ten advisers reported gaining new clients because of CGT changes and/or unexpected liabilities due to cuts in the tax-free allowance. According to the latest HMRC data, 359,000 individuals were liable to CGT in 2023/24, up marginally from 355,000 the tax year prior. 65% of the individuals who paid CGT in 2023/24 had a taxable income under £49,999. This means the majority of those subject to CGT were likely to be basic rate taxpayers, which covers incomes between £12,571 to £50,270 in England and Wales – highlighting that CGT is no longer a tax for the super wealthy.
Looking ahead, the Office for Budget Responsibility (OBR) predicts a significant increase in CGT receipts over the next few years, forecasting a jump to £19.7bn in the 2025/26 tax year, driven partly by asset disposals brought forward by investors anticipating rate rises in the 2024 Autumn Budget. The OBR expects receipts to continue rising, reaching £25.5 billion by 2029/30.
FSL’s findings come amid mounting speculation on whether the government will alter CGT rules again as they look to plug the £40 billion black hole in the nation's finances. External research by wealth manager Saltus suggests that four in five (78%) high net worth families are expecting tax rises in the next year, with nearly half (46%) believe CGT will be hiked again following last year's increases.
Currently, basic rate taxpayers face an 18% tax rate for capital gains, while higher and additional rate taxpayers experience a 24% tax rate. Every individual gets a £3,000 tax-free allowance. The IFS this week called on the government to implement a more “rational” tax system that would be “better equipped” to promote the “prosperity and wellbeing” of taxpayers.
Michael Edwards, managing director of FSL, said: “Given the number of taxpayers that have now been brought into scope for CGT, it’s no surprise that many are turning to advisers for support and expertise.
“With tax reporting becoming an increasing part of advice firms’ day-to-day work, it’s imperative that providers and platforms support their advisers with robust tools and accurate data to make light work of what can be an extremely onerous and complex task. This is also vital to ensure they’re fulfilling their obligations under Consumer Duty and supporting clients with avoiding foreseeable harm such as hefty fines from HMRC.”
