As the Autumn Budget 2026 approaches, Capital Gains Tax (CGT) is again attracting political and professional attention. With the pressure on public finances continuing, wealth taxes may be presented to raise revenue without increasing headline income tax or national insurance rates. One recurring proposal is to align CGT rates with income tax rates.
That would not be unprecedented. Between 1988 and 2008, capital gains were generally taxed at income tax rates, so some taxpayers paid CGT at up to 40%. With current CGT rates at 18% for basic-rate taxpayers and 24% for higher-rate taxpayers, alignment could potentially produce rates of 20%, 40% and 45%. This would be a significant increase for individuals disposing of investments, second homes, shares or business interests. It would also revive an important policy question: if gains are taxed more heavily, should historic reliefs be restored to moderate the impact?
Indexation allowance
A strong argument for reform is that CGT taxes nominal rather than real gains. Assets held for many years may rise substantially in value simply because of inflation, yet the whole gain is generally taxed after deducting only base cost and any available reliefs. Part of the charge may therefore reflect no genuine increase in economic wealth, but merely the erosion of money's purchasing power.
Indexation Allowance, introduced in 1982, addressed this by increasing acquisition cost in line with inflation, so tax applied only to real economic gains. It was frozen for individuals in 1998 and abolished for them in 2008; company indexation was later frozen in 2017. Its removal simplified CGT, but fully exposed inflationary gains to tax.
After recent elevated inflation, the case for adjustment has strengthened. Reform might involve renewed indexation, rebasing assets at a specified date, or a simpler inflation-linked allowance. Any of these could help focus CGT on genuine gains rather than paper increases in value.
Annual exempt amount
The CGT annual exempt amount has also been sharply reduced, from £12,300 to £6,000 in April 2023 and to £3,000 from April 2024, with trustee exemptions similarly reduced. Although it remains available, it’s far less significant.
Historically, the exemption was a useful planning tool. Investors could realise modest gains annually, spouses and civil partners could manage disposals between them, and portfolios could be rebalanced gradually without disproportionate tax costs. The reductions have brought more taxpayers within CGT and increased the need for careful disposal planning. If rates rise, the lower exemption may increasingly affect individuals with modest gains, not only substantial investors.
Retirement relief
Before 1998, Retirement Relief gave substantial relief on gains from qualifying business assets. It recognised that, for many owner-managed businesses, the business itself was the owner's retirement fund. The relief could allow owners to retire, sell or pass on the business without an immediate and excessive CGT charge.
A modern equivalent may attract renewed interest. Family and owner-managed businesses still face succession difficulties where the next generation is taking over, external purchasers are scarce or the owner relies on sale proceeds for retirement. A targeted relief for genuine business disposals could support orderly succession while limiting purely tax-driven arrangements.
Taper Relief and Business Asset Disposal Relief
Taper Relief, introduced in 1998, reduced the taxable proportion of gains according to the period of ownership. It aimed to reward long-term investment and discourage short-term disposals. Business assets received particularly favourable treatment and could eventually attract an effective 10% rate. The relief was abolished in 2008 and replaced by Entrepreneurs' Relief.
That relief, now Business Asset Disposal Relief (BADR), still gives preferential treatment to qualifying business disposals. However, reforms have reduced its value: the lifetime limit is £1 million and the BADR rate is 18% from April 2026. The gap between BADR and mainstream CGT is therefore narrower than before. If general rates increase, pressure may grow to strengthen BADR or support long-term business ownership more broadly.
Would higher rates raise more revenue?
It shouldn’t be assumed that higher CGT rates automatically raise more revenue. The recognised “lock-in effect” means taxpayers may postpone disposals when rates rise, reducing transactions and potentially future receipts. Investors, landlords and business owners can often choose when to realise gains, unlike taxpayers receiving income. Research considered by bodies including the Institute for Fiscal Studies and the Office of Tax Simplification has highlighted behavioural effects and the importance of maintaining incentives for investment, mobility and business growth.
How we can help
Budget changes remain speculative. If the Chancellor raises CGT rates or moves them closer to income tax rates, pressure is likely to build for compensating reliefs. Rather than restoring historic provisions exactly, a modern regime might combine inflation adjustment, incentives for long-term ownership and targeted support for genuine business succession. This could permit higher headline rates while continuing to encourage investment and entrepreneurship.
Taxpayers contemplating disposals, gifts, succession arrangements or business sales should keep CGT planning under review and consider timing, ownership structure and available reliefs before any Budget changes are announced.
If you would like to discuss your own situation in more detail, please contact Alison Pryde, or another of our Personal Tax experts for more information.