AJ Bell has warned that removing the reset of capital gains tax liabilities at death, cutting business relief and ending certain inheritance tax reliefs are among the possible changes to feature in the Budget.
Pensions and savings expert at the platform, Charlene Young, noted that raising the headline rates of capital gains tax would actually result in less tax being paid due to the changes to decision making it would prompt.
“The government’s own figures show that a big increase in CGT rates could backfire and actually lead to lost revenue for the government,” she said.
“For example, raising both the lower and higher CGT rates by 10 percentage points, to 20% and 30% for non-property gains, would result in a total loss of £2.05bn for the Exchequer by 2027/28. That’s because while the rates are higher, investors would be expected to change their behaviour to mitigate paying the tax.”
Young added that there are other options for CGT changes that could raise revenue though, such as eliminating the reset upon death, or changes to the level of business relief.
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“CGT being wiped out on death also creates an incentive in some cases to hold onto assets so they are taxed as part of the estate under IHT, potentially paying less or no tax,” Young said. “But if the government scrapped this tax break, there would likely need to be some allowance made to account for inflation. Otherwise people who have owned investments for a very long time would be severely punished.”
“An alternative would be to get rid of some of the CGT tax breaks for businesses, where business owners selling their company benefit from a lower rate of CGT. Raising this rate from 10% up to 20% to equalise it with standard CGT rates is estimated to generate £710m for the government by 2027/28 – but it’s clearly not a move that will be popular with entrepreneurs.”
Turning to inheritance tax, Young does not expect the headline rate to increase, but some of the reliefs available may well be in Labour’s sights.
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“Often cited as the UK’s most hated tax, despite only being paid by a small proportion of the population, the chancellor could set her sights on raising money through IHT,” Young said. “At 40% it’s already one of the highest tax rates, so it’s unlikely we’d see a headline rate increase. What’s more likely if Ms Reeves did want to change this tax is cutting allowances or whittling away certain reliefs to increase the amount some estates pay.
“A couple leaving their main residence to their children could potentially shelter a £1m estate from inheritance tax, thanks to both the nil-rate band and the residence-nil-rate band, but either of these could be cut,” she continued.
“Another option is taking a red pen to the reliefs given to businesses or to gifting rules – although these aren’t overly generous anyway.”
