Bereaved families could face a total tax rate of 54% if capital gains tax is applied on top of inheritance tax.
The Office of Tax Simplification (OTS) has previously suggested that passing on assets on death should trigger a capital gains tax liability. Currently, beneficiaries can inherit assets without paying CGT.
Several think tanks have also said that CGT should be applied to estates, leading to speculation that Labour could announce this when it unveils its first Budget on 30 October.
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The Labour government has not ruled out making changes to the tax since getting into power on 5 July.
CGT is paid by property owners who make a profit when selling a buy-to-let or holiday home, as well as business owners and investors. For example, if you hold shares or investments outside an ISA, and make a gain above the tax-free allowance, you may incur a CGT bill.
The Labour manifesto promised there would be no increases to income tax, National Insurance, VAT and corporation tax. But it made no such promises about CGT.
Chancellor Rachel Reeves will deliver her first Budget this autumn, and experts are warning that it could contain a CGT hike in a bid to raise revenue.
“Rachel Reeves will soon give a statement of the government’s 'spending inheritance', which could lay the pathway to some difficult decisions on tax changes in the Autumn Budget,” says Chris Etherington, private client partner at the accountancy firm RSM.
“One option that may be given serious consideration could raise the effective tax on certain assets held at death to a rate as high as 54.4%.”
We look at how changes to CGT could result in a “double death tax”, and the likelihood of it happening.
How would a “double death tax” work?
When someone dies, the main tax that beneficiaries worry about is inheritance tax (IHT). This is charged at 40%, and payable on the value of the estate above a certain threshold, known as the nil-rate band.
If a loved one inherits a property or some investments, it is not liable for CGT. So, the beneficiaries are deemed to acquire the asset at market value.
In effect, any capital gains or losses on assets held up to the date of death are wiped out.
This means that when the asset is later sold, only gains from the date of death may be taxable.
However, a government in need of funds for new spending commitments could decide to change the tax treatment of assets on death, and apply CGT.
Etherington explains: “Instead of someone effectively passing on their gains with the inherited asset, their death could be treated as a disposal of the asset and potentially trigger a CGT liability. The net value of the estate’s assets after CGT could then be subject to IHT.”
If this was introduced, someone owning a rental property with a net value and capital gains of £100,000 at the time of their death could trigger a CGT liability of up to £24,000. This is a 24% CGT liability.
The remaining £76,000 might then be subject to IHT at a rate of up to 40%, giving rise to a further tax liability of up to £30,400. Taken together the potential total of the two taxes would amount to £54,400 and a “double death tax” rate of up to 54.4%, according to RSM.
A similar example using unlisted shares, instead of residential property, could give rise to a total effective tax rate on death of 52%.
Laura Hayward, tax partner at wealth management firm Evelyn Partners, points out that Labour could choose to apply CGT to the assets in the estate, “treating them as disposed of on death, in which case it is likely that the estate would have to pay the CGT bill”, but a more likely option is a gradual approach.
She tells MoneyWeek: “A possibly more likely option would be for the assets to be received by the beneficiaries with the base cost remaining as their purchase cost, rather than the value on inheritance. In this case the beneficiary would have to pay CGT when they chose to sell the asset.
“This option would give more flexibility in timing the CGT charge, and would mean the beneficiary would have the sale proceeds to pay the CGT with. In the first option, the estate could struggle to fund CGT charges without making actual sales.”
Hayward warns that either scenario would be complicated to administer, and charging CGT on top of IHT could “give very substantial bills, if there was no offset between the two”.
Will it happen?
The new government will have to raise money somehow to fund its manifesto pledges - and to plug a budget shortfall.
Reeves recently announced that Labour had inherited a projected overspend of £22 billion from the Conservatives.
It may raise money by tinkering with pensions, for example, and it has already said it will apply VAT to private school fees.
And now speculation is mounting that CGT could be a target too.
“Whilst many options for potential tax rises were ruled out by Labour in their manifesto, there is still the opportunity for the new team at the Treasury to review the capital gains tax and inheritance tax rules. A starting point may be to look at some of the suggestions made by the now-disbanded Office of Tax Simplification (OTS),” says Etherington.
The OTS report in November 2020 provided some inspiration for Reeves’ predecessor Jeremy Hunt when he was searching for additional revenues to balance the government’s books.
It recommended that the CGT annual exemption be reduced - and it has since been cut from £12,300 to just £3,000.
The OTS also suggested that the government should consider applying CGT on death.
The Institute for Fiscal Studies has echoed this call, saying death should be treated as a “disposal event” for CGT purposes.
Demos, another think tank, says CGT should be charged when the beneficiary sells the asset, while an all-party parliamentary group has also called for CGT on death to be reformed.
Hayward comments: “While there has been no comment from Labour that this is something it is considering, it would not be a surprise to see changes made to CGT on death.”
Etherington adds that it would “prove tempting to the chancellor”, especially as the rules are complex and “unlikely to be as well understood as a simple change in tax rates”. This means it could be a “safer political path to tread”.
The impact of changing CGT
CGT is not a big revenue raiser. The OBR estimates that CGT receipts will come to £15.2 billion in 2024/25, representing 1.3% of all tax receipts. Less than 3% of adults are reported to pay capital gains tax over a 10-year period.
Lisa Conway-Hughes, chartered financial adviser at LCH Wealth, notes that this means double taxing on death could have limited impact but cause an unnecessary amount of concern.
A double death tax would have the most impact on families who currently fall within the IHT net, where estates are large enough to have substantial assets other than a family home, according to Hayward.
Presumably there would still be a CGT exemption for family homes, like there is at the moment. It would only be investments, assets and other properties that are currently liable for CGT that could potentially be slapped with the tax on death.
Conway-Hughes points out that a benefit of introducing double taxation is that it may encourage people to pay more attention to their estate planning.
She notes: “Which in turn may have a detrimental impact to the overall tax take for inheritance tax [if assets are sold earlier before death]. It could also be a carrot to spend assets before touching your pension too.”
What other changes could Labour make to CGT?
Several Labour MPs have said that CGT rates should be increased, with some backing a raise to bring it in line with the rates of income tax.
CGT on stocks and shares is charged at either 10% or 20% depending on an investor’s other taxable income. The rates rise to 18% and 28% for CGT on property.
Conway-Hughes tells MoneyWeek: “I have heard speculation that CGT may be increased in line with income tax, which feels a more likely outcome to me.”
Hayward adds: “A CGT rate rise could certainly form part of a package of measures to increase tax revenue, and it is quite possible that Labour could look to increase rates of capital gains tax at the next Budget.”
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