Capital gains tax: hidden dangers in planning for Labour’s Budget

It has been widely reported that Chancellor Rachel Reeves may look at increasing the rates and scope of capital gains tax (CGT) in the first Budget of the new Parliament on 30 October 2024. This has, in turn, prompted much speculation on both the nature of the incoming changes and the timing of when they will take effect.

Naturally, businesses and investors who are within the charge to CGT (as distinct from corporate tax on capital gains) are considering how these changes might impact them, with one area of focus being on the impact on those holding land as an investment, i.e. as a capital asset.

If it becomes clear that CGT rates will rise to align with income tax rates, landowners within the charge to CGT may wish to reclassify or ‘appropriate’ that land to trading stock before Budget Day. An appropriation to trading stock will trigger a deemed disposal for CGT purposes, thereby allowing unrealised gains to be taxed at CGT rates, which may be beneficial if such rates become aligned with income tax rates.

What can be done?

As shown in the example above, tax planning can be a complex endeavour with the best solution – and usually the most cost effective in the long run – being to engage tax advisers early. They can then take a holistic approach to advising on transactions and structures to ensure potential liabilities and pitfalls are avoided.

Persons within the charge to CGT will need to weigh up all the factors in deciding whether or not to make an appropriation. One obvious point to consider is what would happen if CGT rates actually stay where they are. The appropriation is a one-way bet, but persons within the charge to CGT can elect for their CGT base cost to become, broadly speaking, their acquisition cost for income tax purposes. This can at least prevent the ‘dry’ tax charge described above. If an appropriation occurs in the 24/25 tax year, persons within the charge to CGT would have until 31 January 2027 to make such an election.