With the UK Budget scheduled for 30th October, speculation is mounting in the financial world. One of the key changes anticipated is an increase in Capital Gains Tax (CGT) rates. This could have significant implications for property owners, investors, and cryptocurrency traders alike. In this blog, we’ll explore what the next budget might bring, how it could impact cryptocurrency investors, and what steps you can take to prepare.
The Anticipation of a CGT Rate Hike
The UK government is under increased financial pressure due to the effects of the pandemic, rising public spending, and inflation to cover forecasted budget deficit of £87.2 billion. To raise revenue, the Chancellor may look to increase CGT rates, particularly targeting those with large investment portfolios, property gains, and cryptocurrency profits. For cryptocurrency investors, this could mean paying more when selling assets.
Investors, including those in the cryptocurrency market, are concerned about a potential rate hike. Keir Starmer’s recent comments that “30 October will be painful” have heightened fears of a tax raid.
Current CGT Structure in the UK
CGT is charged on profits made from selling assets that have appreciated in value. If rates rise, investors could see a larger portion of their cryptocurrency gains being taxed by HMRC. Before considering the potential changes, let’s briefly recap the current CGT structure:
- Basic Rate Taxpayers: Pay 10% CGT on most assets, including cryptocurrency gains, and 18% on residential property gains.
- Higher Rate Taxpayers: Pay 20% CGT on most assets, including cryptocurrency gains, and 24% on residential property gains, following a recent reduction.
- Annual CGT Allowance: Each individual has an annual tax-free CGT allowance of £6,000 (2023-24). This drops to £3,000 in 2024-25, making tax planning more essential.
- Business Asset Disposal Relief : Sole traders and partners selling their business may qualify for the lower BADR rate of 10 per cent, up to a lifetime limit of £1 million.
This structure helps smaller investors shield some gains, but higher rates or a reduction in allowances could lead to significantly higher tax bills.
Why the Government Might Raise CGT Rates
- Labour’s election manifesto rules out significant changes to key taxes like income tax, national insurance, VAT, and corporation tax. However, capital gains tax (CGT) has gained attention as it was notably absent from Labour’s manifesto.
- The government is exploring ways to stabilize public finances without increasing everyday income taxes. Raising CGT rates could focus on individuals with significant capital gains, such as cryptocurrency investors, and generate additional revenue.
- Governments often run deficits, leading to a growing national debt over time. Crises like wars or pandemics further increase this debt. In 2024-25, public debt is expected to reach 98.8% of national income, roughly £2.7 trillion, or £96,000 per household.
- Despite the reduction in CGT on residential property from 28% to 24%, CGT rates have remained unchanged since 2016 and are still at historically low levels. These rates are significantly lower than income tax rates and tend to benefit wealthier individuals.
- The difference between CGT and income tax rates can influence business and family financial decisions, encouraging taxpayers to reclassify income as capital gains to benefit from the lower rates.
- The Office of Tax Simplification (OTS) recommended aligning CGT rates with income tax rates in its 2020 review. Although this proposal hasn’t been implemented, it remains under consideration.
- Experts predict that CGT rates could be increased to match income tax rates, potentially rising from 20% to as much as 40% for higher-rate taxpayers and 45% for additional rate taxpayers.
Key Considerations Before Raising CGT Rates
- The government should carefully weigh several factors before increasing Capital Gains Tax (CGT) rates, as the economic implications could be significant.
- Inflationary Adjustment: Although CGT rates are historically low, the lack of adjustment for inflation and the relatively small tax-free allowance mean that investors may face substantial tax bills on long-held assets, as inflation erodes real gains.
- Impact on a Smaller, Wealthier Group: In the 2024-25 tax year, CGT revenue is forecasted at £40.5 billion, just 3% of the total tax revenue of £1,139 billion. A large portion of CGT is paid by a small number of taxpayers making substantial gains. In 2022-23, 41% of CGT came from those with gains of £5 million or more, though this group comprised just 1% (3,690 taxpayers) of the total CGT taxpayer base (369,000 taxpayers). Half of the CGT revenue came from London and the south of England.
- Potential Reduction in Tax Revenue: If CGT rates rise too sharply, investors may delay selling assets to defer tax liability. A moderate increase, such as raising the rate from 20% to 25%, could be more effective than aligning CGT with income tax rates, which might reduce overall revenue.
- Economic Impact: Higher CGT rates could discourage property sales, reduce market liquidity, and deter entrepreneurs from selling their businesses. This could slow economic growth and limit investment in the UK.
- Brain Drain Risk: Raising CGT rates might prompt wealthy investors, talented individuals, particularly innovators and entrepreneurs, to relocate to countries with more favourable tax environments, leading to a loss of high-skilled talent.
Potential Impacts of a CGT Increase on Cryptocurrency Investors
For cryptocurrency investors, any CGT hike could have a profound effect. Cryptocurrency profits, already subject to CGT, would see a larger portion taxed. This might prompt many investors to sell before the rate increase, as has happened in the past when CGT changes were anticipated.
Historically, changes in CGT rates announced in the budget take effect from the following April. However, recent trends show that some changes could be implemented immediately, potentially taking effect from midnight on the day of the budget.
Tax Planning Strategies for Cryptocurrency Investors to Reduce Exposure to Potential CGT Rate Increases
With the possibility of a CGT rate increase looming, there are strategies cryptocurrency investors can use to mitigate their tax burden:
- Realize Gains Early: Consider selling some assets now to lock in the current, lower CGT rates. This is particularly relevant for those holding large cryptocurrency portfolios.
- Maximize Your CGT Allowance: Make use of the £3,000 CGT allowance before it drops. Spreading gains across tax years can help reduce overall liability.
- Timing of Disposal: differing disposal of assets making losses or negligible value claim for future tax year to offset against higher CGT rates.
- Spousal Transfers: Transferring assets between spouses is exempt from CGT. This can maximize allowances and reduce your tax liability.
- Tax-Deferred Investments: Explore tax-efficient options like ISAs, pensions, and the Enterprise Investment Scheme (EIS) to defer CGT liability or shelter gains entirely.
- Bed-and-Breakfasting Strategy: Sell and repurchase cryptocurrency within 30 days if the government doesn’t implement a rate increase, allowing you to reset your cost base while realizing gains.
- Consider relocating to cryptocurrency-friendly countries: becoming a non-UK tax resident by moving to a jurisdiction with favourable tax laws for cryptocurrencies in order to realise your gains. A CGT rate of 45% would be one of the highest in the world and nearly every country in Europe could inadvertently become a more attractive place than the UK to realise the gains
Preparing for the Future
As the UK budget approaches, it’s essential for cryptocurrency investors to stay informed and proactive. By understanding potential changes and implementing tax planning strategies now, you can protect your gains and minimize the impact of a CGT rate increase.
While we won’t know for sure what changes are coming until the budget is announced, now is the time to start preparing. The more proactive you are, the better positioned you’ll be to mitigate the impact of a CGT rate increase
Seek Professional Advice: Tax planning is complex, especially with impending changes. Consider consulting an accountant or financial advisor who specializes in capital gains and cryptocurrency tax to make sure you’re taking full advantage of available reliefs and exemptions.
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DISCLAIMER
© My Accountancy Team 2024 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. My Accountancy Team Ltd t/a mycryptotax.co.uk, cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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