SUMMARY: The recent Autumn Budget 2024, delivered by Chancellor Rachel Reeves, has sparked significant discussion regarding its implications for investors and the broader economy. With a notable increase in Capital Gains Tax (CGT) rates, the financial landscape for those investing in stocks, bonds, and real estate is set to change. This article examines the fundamentals of capital gains tax, the recent changes introduced by the Labour government, and their implications for investors, particularly in relation to the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
What is Capital Gains Tax?
Capital gains tax is levied on the profit made from selling certain types of assets, including stocks, bonds, and real estate. The tax is calculated based on the difference between the purchase price (the basis) and the sale price of the asset. For many investors, capital gains represent a significant portion of their income, making the tax an important consideration in their investment strategies.
The Autumn Budget Shake-Up
Chancellor Rachel Reeves announced several key changes to CGT rates during the Autumn Budget. The lower CGT rate will rise from 10% to 18%, while the higher rate will increase from 20% to 24%. These adjustments are part of a broader strategy to generate approximately £2.5 billion for public spending. Notably, the tax-free allowance has been reduced from £12,300 in 2022/23 to £3,000 in 2024/25, which could affect a larger number of investors than anticipated.
Importantly, business asset disposal relief will stay at 10% for the current year, increasing to 14% in 2025 and 18% in 2026, maintaining a £1 million lifetime limit. Critics of the budget argue that these tax hikes may discourage saving and investing, potentially undermining the government’s goal to foster a culture of investment.
Implications for Investors: A New Era
The increase in CGT rates is expected to have a substantial impact on investor behaviour. Financial advisers predict that investors may choose to hold onto their assets longer, thus potentially affecting market liquidity. The new rates may also dissuade new investments, as many individuals consider the implications of higher taxation on their returns. With CGT set to raise about £15 billion annually, it is primarily targeted at wealthier individuals, particularly in areas like London, where investment activity is more concentrated.
Furthermore, the immediate effect of these changes means that investors will need to reassess their portfolios and investment strategies to mitigate the increased tax burden. The Labour government has positioned this move as a necessary step to support public finances while emphasising the importance of growth.
Unlocking the Benefits of SEIS & EIS
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are government initiatives designed to encourage investment in small, high-risk businesses. SEIS allows investors to claim up to 50% tax relief on investments up to £100,000 in qualifying companies, while EIS offers 30% relief on investments up to £1 million. Both schemes aim to stimulate economic growth by supporting startups and small enterprises, making them attractive options for investors seeking tax-efficient investment opportunities.
At ShareMatch, we have obtained SEIS and EIS advance assurance, positioning our offerings as appealing for those looking to invest in promising ventures while benefiting from substantial tax relief. This provides investors with the dual advantage of potentially high returns and reduced tax liabilities, even in light of the recent changes to CGT.
Conclusion
The Autumn Budget 2024 has introduced significant changes to capital gains tax, raising rates that will affect many investors across the UK. While these measures aim to bolster public finances, they also present challenges for investment behaviour and market dynamics. Understanding the implications of these changes is crucial for investors as they navigate the evolving financial landscape. By leveraging schemes like SEIS and EIS, investors can find ways to mitigate the impact of increased taxation while still pursuing lucrative opportunities in the market.
