Matt Spencer, tax partner and Krishna Mahajan, senior associate in the tax disputes practice at Kingsley Napley LLP
In an interview with Bloomberg TV last week new Chancellor Rachel Reeves declined to rule out an increase in Capital Gains Tax.
Speculation is mounting that this may be on the cards to help plug the £22bn ‘black hole’ she spoke of after reviewing public finances.
The internet is alive with theories on what CGT reform might look like. One option, for example, involves bringing CGT rates up to match income tax rates which it has been said would raise an additional £14 billion.
What practical steps should individuals be taking if they are concerned CGT rates are going to rise on 30th October in Ms Reeves’ first Budget?
There are two obvious choices and one less obvious option for those with property assets that would be impacted ie those considering selling or in the process of selling a property which hasn’t always been their main home.
Don’t sell
A sale triggering capital gains is often not essential. This will likely be in the government’s mind when it considers if it should increase CGT, and by how much. Increase it too high, and disposals will drop off (and CGT revenue may, in turn, decrease). However, this may only be a short-term trend if owners decide CGT rates might stay high for at least several years and if there is political pressure not to reduce CGT rates in the future.
Sell fast
CGT rates right now are reasonably generous, at 20% (assuming higher or additional rate taxpayers). There is a separate rate for residential property, which the Conservative government recently reduced from 28% to 24%. Of course, selling fast will inevitably require co-operation from the other side which may come at a price.
Exchange fast
This is based on the fact the date of disposal for CGT purposes is often not what you might assume. CGT is actually triggered when a contract for sale is entered into, not when that contract later completes (subject the conditions described below). So if we assume the Chancellor increases CGT rates effective from the Budget date of 30 October, a CGT liability might be under the “old” rates if a sale contract is entered into before 30 October but with completion taking place later.
The caveat here is “might” for two reasons. Firstly, if a contract is contrived purely to benefit from lower tax rates, it will probably fail.
Secondly, to benefit from the “old”/current tax rates at the contract date the contract must be unconditional as this crystallises the disposal date at the earlier contract date and not completion. If, for example, a sale of real estate is conditional on achieving planning permission, the relevant date for CGT purposes depends on whether the “condition” is a condition precedent or condition subsequent. Broadly, a condition precedent means a contract is only binding on the buyer and seller after the condition is satisfied. A condition subsequent is one which a binding contract requires a party to complete. Only conditions precedent delay the time of disposal for CGT purposes.
Determining whether your sale fact pattern includes a “condition subsequent” or “condition precedent” is not always clear cut. Heads of terms between a buyer and seller almost certainly fail to trigger a disposal for CGT purposes. Caselaw found a contract to be unconditional where the completion date was fixed and the buyer had to seek planning (and could rescind the contract if planning was not obtained) however, and therefore did trigger CGT on the date of contract.
In summary – with less than three months to go before the budget on 30 October 2024 when there is a good chance CGT rates will rise, those considering selling, or in the process of selling a property should act fast to maximise chances of paying CGT at the current rates.
It would also be advisable to take tax advice for transactions that have recently completed but in respect of which payments may continue to be received after 30 October.
