UK Government set to raise capital gains tax rate

In a significant development, British Chancellor of the Exchequer Rachel Reeves declared on Wednesday, October 30, an increase in capital gains tax rates affecting most assets, including stocks and cryptocurrencies. The new framework will see the tax rate rise from 10% to 18% for lower earners, and from 20% to 24% for those in higher income brackets.

Reeves highlighted that these changes are anticipated to yield £2.5 billion, aligning capital gains tax rates with those already in effect for property transactions, which will remain steady at 18% and 24%.

Addressing the rationale behind these tax modifications, Reeves remarked, “We need to drive growth, promote entrepreneurship, and support wealth creation, while raising the revenue required to fund our public services and restore our public finances.” She further noted that even with the tax increases, the UK will still have “the lowest capital gains tax rate of any European G7 economy.”

The capital gains tax is applied to profits over £3,000 earned from the sale of an asset, with rates varying based on an individual’s income tax bracket and the amount of profit realized.

In addition to the general hike in capital gains tax, Reeves announced an increase in the tax rate on carried interest—earnings accrued by fund managers based on investment profits. The rate for carried interest will increase from 28% to 32%. While acknowledging the essential role of the fund management industry in the UK economy, Reeves stressed the necessity for a “fairer approach” to the taxation of carried interest.

For entrepreneurs, there is some relief: the lifetime limit for Business Asset Disposal Relief will remain at £1 million, with the rate held at 10% for the time being. However, adjustments are forthcoming—this rate is set to rise to 14% in April 2025 and 18% in 2026-27. These changes aim to encourage ongoing investment in businesses while gradually enhancing revenue.

According to the Office for Budget Responsibility (OBR), the new measures are projected to generate an additional £2.5 billion by the conclusion of the forecast period. Last year, capital gains tax contributed £15 billion, accounting for approximately 4% of the total income tax revenue.

Historically, capital gains tax has been levied at lower rates than income tax to stimulate entrepreneurial activity. However, this has also facilitated widespread utilization of capital gains tax strategies among the self-employed to minimize their regular income tax liabilities.