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Bereaved families could face a huge tax bill under an Andy Burnham premiership if the likely next Prime Minister presses ahead with a policy to hike capital gains tax on assets of the deceased.
Supporters of Burnham, including the former health secretary Wes Streeting and ex-transport minister Louise Haigh, have said previously they believe wealth in the UK is undertaxed and have called for reform of the capital gains tax (CGT) system.
Among the measures suggested include aligning the rate of CGT paid with income tax and abolishing the CGT uplift on death. Under current rules, upon death assets receive a ‘tax uplift’, meaning gains accrued over a lifetime are wiped out and assets are taxed at their original acquisition cost.
Removing CGT uplift on death could leave families facing a near £120,000 tax bill when dealing with an inherited home that has risen £500,000 in value over 25 years, according to analysis from Rathbones.
“For many families, the removal of CGT uplift on death would feel like a one-two punch. Not only could inherited wealth be subject to inheritance tax, but beneficiaries could also face a CGT bill on gains that accrued during their loved one’s lifetime,” said Ed Wood, financial planning director at Rathbones.
Abolition impact
Current CGT rates are 18 per cent for basic rate taxpayers and 24 per cent for higher and additional-rate taxpayers, with a £3,000 annual exemption.
If the 24 per cent CGT rate is held, a property that has risen in value by £500,000 over a 25 year period could ultimately face a £120,000 bill when it is sold.
A property that has seen its value rise by £300,000 could be slapped with a bill of roughly £71,000.
Rathbones also raised concerns on bringing CGT in line with income tax rates, with higher rate tax payers to potentially be slapped with a 45 per cent rate on gains.
If this occurred, an additional-rate taxpayer making a £50,000 gain outside tax wrappers such as ISAs and pensions could face a tax bill of £21,150, a near £10,000 increase, compared with the current regime.
Discouraging investment
Industry figures have raised concerns that a change such as this could discourage investors from selling assets in order to dodge a swollen tax bill, ultimately damaging the government’s ambition to boost domestic investing.
“There is a risk that further increases in the CGT burden could discourage investment at a time when the UK needs private capital to turbocharge economic growth,” Wood said.
“There is also a question over whether higher rates would ultimately deliver the expected boost to the public finances, as investor behaviour often changes in response to tax increases.”