Budget briefing | Tax |

Budget 2021: Capital gains tax - annual exempt amount freeze

Overview

The Chancellor announced that the capital gains Annual Exempt Amount (AEA) will stay at its present level until April 2026. The AEA is essentially the value of gains that a taxpayer can realise in a given tax year before paying capital gains tax (CGT). This announcement means the AEA will no longer increase annually in line with increases in the Consumer Prices Index. The AEA is currently £12,300 for individuals and personal representatives and £6,150 for most trustees of settlements.

This measure is expected to raise revenue for the Exchequer incrementally over the years, with an additional £30 million expected in 2025/26. This is in keeping with the trend seen elsewhere in the Budget of measures designed to bring in increased tax over the years by way of "fiscal drag", rather than up-front tax rate increases – which are often, politically, a much harder sell. 

It is, however, perhaps surprising that the Chancellor chose not to cut the AEA or increase CGT rates in this Budget. The Office of Tax Simplification in their recent report into CGT (prepared at the Chancellor's request) found that both the relatively high level of the CGT AEA and the relatively low level of CGT rates - as compared to income tax rates - had a distortive effect on taxpayer behaviour (with taxpayers incentivised to try and arrange their affairs in a way that effectively re-characterises income as capital gains) and recommended both reducing the AEA and increasing CGT rates as a way to reduce the distortion. 

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