The United Kingdom government is considering a significant increase in capital gains tax (CGT) ahead of the upcoming autumn Budget, scheduled for October 28. This potential change aims to align CGT rates more closely with income tax, which would mark the second rise in two years and could substantially impact a broadening array of investors.

Capital gains tax is levied on the profit made from selling assets such as second properties, non-ISA investments, classic cars, jewelry, and artwork. Homeowners are exempt from CGT on the sale of their primary residence, and investments held within Individual Savings Accounts (ISAs) are not subject to the tax. However, recent policy changes have reduced the CGT annual exemption significantly—from £12,300 down to £3,000—resulting in a sharp increase in the number of taxpayers affected.

Data for the 2024-25 fiscal year indicates that CGT payments reached a record £24.2 billion, almost doubling in just one year, while the number of taxpayers subject to the charge rose by 45 percent to 584,000. Under the proposed changes, basic rate taxpayers could see their CGT rate increase from 18 percent to 20 percent, while higher rate taxpayers could face a jump from 24 percent to 40 percent—effectively equalizing CGT with income tax rates.

Supporters of the increase argue that it is fair for investors to pay similar taxes as workers, given that capital gains represent unearned income. Critics, however, caution that raising CGT could discourage investment by reducing incentives to assume financial risks. Financial experts, including Jason Hollands of Evelyn Partners, emphasize that investing involves uncertainty and potential losses, which justifies lower tax rates compared to earned income. Some analyses, including modeling by HM Revenue & Customs (HMRC), suggest that higher CGT rates might lead to reduced tax revenues overall, as investors delay sales to avoid higher taxes.

Recent figures provide some evidence of this behavioral response. Between April and August 2024, CGT revenues fell slightly by £8 million compared to the same period last year, indicating some reluctance among investors to crystallize gains under current tax conditions.

Another criticism of CGT is that it does not account for inflation. For example, selling a property that was purchased a decade ago at a higher nominal price may trigger a substantial tax bill despite no real increase in value after adjusting for inflation.

In anticipation of a possible CGT hike, some investors are taking steps to mitigate their exposure. Strategies include selling assets before the Budget announcement, utilizing tax-advantaged accounts such as ISAs and pensions, transferring assets between spouses or civil partners to maximize individual allowances, and spreading asset sales over multiple tax years to use annual exemptions efficiently. However, experts advise that such approaches require careful planning and professional guidance.

Others may choose to hold onto assets indefinitely to avoid realizing taxable gains. Notably, CGT liabilities currently do not transfer upon death; instead, inheritance tax may apply to estates, a feature that could be reconsidered in future fiscal policies.

With Chancellor John Healey expected to present the Budget on October 28, investment communities and taxpayers alike await further details on how these prospective changes will reshape the tax landscape for capital gains.