It’s no surprise that chancellor Rachel Reeves has chosen to hike wealth taxes and reduce or remove some of the reliefs associated with them. But in some cases, the effects could be unforeseen.
Having confirmed the existence of a £22bn ‘black hole’ in the public finances in July, the chancellor has been warning for several months that tax increases as well as spending would be needed to reset the economy.
At the same time, the government’s pledge to protect the interests of working people by not increasing employee national insurance contributions, income tax or VAT made it clear by default that ‘wealthy people’ would have to pay.
Capital gains tax is often regarded as a wealth tax as it is a tax paid on profits gleaned from the disposal of assets such as shares or personal belongings, which is not an everyday activity for the average working person.
However, as a lawyer who is often called upon to act as a deputy or trustee for people who have been awarded large sums in damages after suffering a serious injury caused by an accident or some form of negligence, I know that sometimes a wealth tax is not a tax on ‘wealth’.
The chancellor’s decision to increase the standard rate of CGT to 18 per cent, and the higher rate to 24 per cent, from October 2024, could have far-reaching consequences for the hundreds of people awarded damages in the UK each year who, through no fault of their own, have been left with a debilitating or life-limiting condition such as brain damage or paralysis.
For these individuals and their families, who must meet the cost of care and specialist support services or equipment over many years, any increase in the tax payable on their award is grossly unfair.
The damages they receive have been carefully calculated to meet their lifetime needs, and any tax increases that their awards attract along the way will not have been factored in. They could also be hit by higher costs for personal care services due to the hike in employer national insurance contributions.
Most people would agree that this niche group of individuals who are awarded damages as a result of another’s negligence should not be regarded as ‘wealthy’ in the same way as someone who profits from the sale of a capital asset, such as a second home or shares in a public or privately owned company. However, currently they are.
Even though the hike in CGT rates is not as onerous as some analysts had expected, it is still significant.
Recognising this and wanting to tread carefully when it comes to investors, the chancellor is allowing business owners time to adjust to the changes by phasing in increases to business asset disposal relief and investors’ relief.
