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As speculation grows over potential changes to Capital Gains Tax (CGT) under an Andy Burnham government, new analysis from Rathbones reveals that investors and families could face significantly larger tax bills if key reforms are introduced.
The calculations examine two changes that have featured prominently in recent tax policy debates: the abolition of CGT uplift on death and the alignment of CGT rates with income tax rates. Current CGT rates are 18% for many basic-rate taxpayers and 24% for higher and additional-rate taxpayers, with a £3,000 annual exemption.
The analysis shows that abolishing CGT uplift on death could leave beneficiaries facing a tax bill of almost £120,000 when selling an inherited family home that has risen in value by £500,000.
Meanwhile, aligning CGT rates with income tax rates could increase the tax bill on a £50,000 gain by nearly £10,000 for additional-rate taxpayers and more than £7,500 for higher-rate taxpayers.
Ed Wood, Financial Planning Director at Rathbones, says: "We've seen a significant increase in client enquiries about CGT as speculation grows over what fiscal measures a new government might consider to fund its economic agenda. With commitments made on the main tax levers, many investors see CGT as a potentially tempting area for area for policymakers looking to raise additional revenue.
"However, 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. 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.”
Potential impact of abolishing CGT uplift on death
Under current rules, assets are generally rebased for CGT purposes on death, meaning gains accrued during the deceased's lifetime are wiped out. If this relief were abolished and inherited assets retained their original acquisition cost, beneficiaries could face substantial tax liabilities when those assets are eventually sold.
Rathbones' analysis* shows that, assuming a 24% CGT rate:
|
Lifetime gain on inherited asset |
Estimated CGT liability |
|
£150,000 |
£35,280 |
|
£300,000 |
£71,280 |
|
£500,000 |
£119,280 |
A family inheriting a property that has risen in value by £500,000 over a 25-year period could therefore face a CGT bill approaching £120,000 when the property is ultimately sold.
The prospect of abolishing CGT uplift on death comes alongside planned inheritance tax changes that will bring unused pension funds within the scope of IHT from April 2027.
Ed Wood says: "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. Add in the forthcoming inclusion of unused pension pots within inheritance tax calculations, and there is a growing concern that a much larger slice of intergenerational wealth will end up in the taxman's coffers."
"The tax implications are only part of the story. Removing CGT uplift on death could also create a paperwork nightmare for executors, who may be forced to reconstruct decades of ownership history, track down purchase records, calculate the cost of long-forgotten improvements and establish the original acquisition cost of assets that may have been held for generations.
"For grieving families, the challenge may not just be paying the tax, but establishing how much tax is due in the first place. Any reform would therefore risk adding significant complexity, cost and delay to the administration of estates at an already difficult time."
Potential impact of aligning CGT with income tax rates
There has also been growing speculation that CGT rates could be aligned with income tax rates, potentially increasing the rate paid on gains to as much as 45% for additional-rate taxpayers.
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, compared with £11,280 under the current regime — an increase of £9,870.
Higher-rate taxpayers would also face a notable increase in their tax burden. A £10,000 gain would generate a tax bill of £2,800, up from £1,680 currently. On gains of £50,000, the tax liability would rise to £18,800, compared with £11,280 today.
Basic-rate taxpayers would also be affected, with the tax bill on a £10,000 gain rising from £1,260 to £1,400 if CGT rates were aligned with income tax rates.
Kirsty Cartwright, Investment Director at Rathbones, says: "For higher and additional-rate taxpayers, aligning CGT rates with income tax rates could add thousands of pounds to the tax bill on a single disposal. For business owners, landlords and long-term investors, any reforms could have implications not only for investment returns, but also for succession planning and the transfer of wealth between generations."
"While speculation has prompted useful conversations about tax planning, investors should avoid letting tax considerations alone drive investment decisions. One approach we use is agreeing a CGT budget with clients, allowing gains to be realised in a measured way while reinvesting into opportunities that are better aligned with their objectives, circumstances and risk profile.
"The key is not to let the tax tail wag the investment dog. After all, CGT is only payable when you've made a profit. Whatever policy changes may come, making full use of available allowances and tax-efficient wrappers such as ISAs and pensions remains as important as ever."
