UK Government set to raise capital gains tax rate

British finance minister Rachel Reeves made a significant announcement on October 30th, revealing an increase in capital gains tax rates for various assets, including stocks and cryptocurrencies. The new plan will see the tax rate rise from 10% to 18% for lower earners and from 20% to 24% for higher earners. This adjustment is expected to generate £2.5 billion and align capital gains tax rates with those already applied to property transactions, which remain steady at 18% and 24%.

Reeves explained that these changes aim to stimulate growth, encourage entrepreneurship, support wealth creation, and generate the necessary revenue to fund public services and restore public finances. She emphasized that even with this increase, the UK will still have the lowest capital gains tax rate compared to any other European G7 economy.

Capital gains tax is imposed on profits exceeding £3,000 from the sale of an asset. The rate paid depends on an individual’s income tax bracket and the size of the gain. In addition to the general capital gains tax increase, Reeves also announced a rise in the rate charged on carried interest, which is the income earned by fund managers based on investment profits. The new carried interest tax will increase from 28% to 32%.

While recognizing the vital role played by the fund management sector in the UK economy, Reeves highlighted the need for a fairer approach to taxing carried interest. Entrepreneurs, on the other hand, received some relief as the Business Asset Disposal Relief lifetime limit will remain at £1 million, with a tax rate of 10% for now. However, changes are on the horizon, with the rate set to increase to 14% in April 2025 and 18% in 2026-27. This adjustment aims to ensure that entrepreneurs continue to invest in their businesses while gradually generating additional revenue.

According to the Office for Budget Responsibility (OBR), these measures are projected to bring in an additional £2.5 billion by the end of the forecast period. Capital gains tax raised £15 billion last year, contributing approximately 4% of the total income tax revenue.

In the past, capital gains tax has been set at a lower rate than income tax to promote entrepreneurial activity. However, this has led to widespread utilization of capital gains tax strategies by the self-employed to reduce their ordinary income tax obligations.