Key Changes to Capital Gains Tax and Carried Interest – What You Need to Know

Headshot photo of Thorne Widgery Head of Tax Elizabeth Roberts

The Autumn 2024 Budget has introduced significant changes to Capital Gains Tax (CGT) and the taxation of carried interest, aiming to ensure asset owners contribute a fair share while maintaining the UK’s competitiveness in international tax markets. But how will these changes impact you, and what steps can you take to manage them effectively? Our Head of Tax Elizabeth Roberts shares her insights.

Capital Gains Tax Rate Adjustments

The Budget sees an increase in the lower CGT rate from 10% to 18% and the higher CGT rate from 20% to 24%. These changes align CGT rates on most assets with those applicable to residential property, which remain unchanged.

These adjustments represent a major change for investors and business owners. It is a time to reassess investment strategies and consider using reliefs and allowances to optimise your tax position.

Available Reliefs and Allowances

Despite the rate increases, there are still strategies you can use to manage your CGT liability:

1. Annual Exempt Amount (AEA)

Although the AEA has been reduced in recent years, it remains a valuable tool. Individuals can still offset £3,000 of their gains tax-free (£6,000 for married couples or civil partners who can transfer assets between them).

2. Spousal Transfers

Transferring assets between spouses or civil partners before disposal can reduce the overall tax liability by utilising both partners’ allowances. This can also help in accessing lower tax rates and effectively managing CGT liabilities.

3. Bed and ISA/ Bed and SIPP Strategies

Selling assets and repurchasing them within an Individual Savings Account (ISA) or Self-Invested Personal Pension (SIPP) can shield future gains from CGT, helping to reduce the taxable gain on any future asset disposals.

Reforms to Carried Interest Taxation

Carried interest, the profit share received by fund managers, will undergo significant changes as well.

  • From April 2025, the CGT rate on carried interest will rise to 32%.
  • From April 2026, carried interest will be taxed as income, potentially leading to higher tax liabilities for fund managers.

The reclassification of carried interest as income marks a substantial shift for fund managers. This calls for a thorough review of compensation structures and tax planning strategies to adapt to the new regime.

Changes Affecting Limited Liability Partnerships (LLPs)

Previously, LLPs could transfer assets within the partnership tax-free until liquidation. However, from October 2024, assets contributed to an LLP will be taxable from the outset, addressing certain tax avoidance strategies.

LLPs must carefully evaluate the tax implications of asset contributions, reassess their structure’s suitability, explore alternative options, and plan for potential cash flow needs. Accurate valuations and regular tax reviews are central to adapting to these changes and avoiding unforeseen liabilities.

Helping You Prepare

At Thorne Widgery, we are committed to helping you understand and adapt to these changes. By ensuring your financial strategies remain compliant, we can help you manage your tax position and mitigate the impact of these new rates and regulations.

Contact us today for more details by emailing info@thornewidgery.co.uk or calling us at 01432 276393.