Bereaved families in the UK could face substantial new tax burdens on inherited assets if proposed reforms to capital gains tax (CGT) are implemented under an Andy Burnham-led government. A £500,000 gain on a home over 25 years, for example, could result in a staggering £120,000 CGT bill – a one-two punch that would see families hit with both inheritance tax and a charge on lifetime gains.
Currently, when an individual dies, their assets receive a 'tax uplift', resetting the cost basis to its market value at time of death. This means beneficiaries are only taxed on gains from the date of inheritance. However, supporters of Mr Burnham argue that wealth in the UK is undertaxed and requires reform – a position echoed by prominent Labour figures Wes Streeting and Louise Haigh.
Financial planning firm Rathbones warns that removing this 'uplift on death' could lead to significant financial implications for families. Their analysis suggests that aligning CGT rates with income tax would see additional-rate taxpayers facing a 45 per cent charge, adding nearly £10,000 to a £50,000 gain compared to the existing system.
CGT rates currently stand at 18 per cent for basic rate taxpayers and 24 per cent for higher and additional-rate taxpayers, with an annual exemption of £3,000. Industry experts have expressed concerns that increasing the CGT burden could discourage individuals from selling assets – potentially hindering economic growth ambitions.
While specific proposals would depend on a future government's legislative agenda, discussions around CGT reform signal a potential shift in how inherited wealth is taxed in the UK. Critics argue that higher tax rates do not always translate into increased public finances, as investor behaviour often adapts in response to tax changes.
Rathbones' Financial Planning Director Ed Wood described the potential scenario of inheriting a taxable asset with significant lifetime gains as "a perfect storm" for families – one that could lead to unintended economic consequences. With no clear end in sight to these discussions, UK families are left to navigate the uncertain tax landscape.
Industry insiders point out that increased CGT rates do not necessarily translate into greater public revenues, as investors and taxpayers often adapt their behaviour in response to changes in taxation. This could lead to unintended economic outcomes – a cautionary tale for policymakers considering sweeping reforms to capital gains tax.
The proposed reforms also raise questions about the broader implications of these changes on domestic investment and economic growth. Critics argue that discouraging individuals from selling assets would undermine government ambitions to boost investment and stimulate growth.