The government could scrap a form of tax relief on the sale of assets after someone dies in order to plug a £23bn tax shortfall, an expert has predicted, which would result in Brits paying a new form of ‘inheritance tax’. The amount of money raised by capital gains tax is set to fall by an estimated £23 billion by 2030, the Office for Budget Responsibility (OBR) said this week.
Charlene Young, senior pensions and savings expert at AJ Bell, said the government might look at the so-called capital gains tax (CGT) uplift on death which currently allows families to inherit assets without paying both CGT and inheritance tax (IHT).
The Institute for Fiscal Studies (IFS) called for the uplift to be scrapped last year, saying it would cost £1.6 billion in lost tax receipts.
Young said the government had underestimated the impact of last autumn’s budget and it may look to remove a rule which means assets left after death can only be subject to inheritance tax or capital gains and not both.
She said a hike in capital gains tax from 6 April was putting Brits off from buying or selling investments – including property and shares – in order not to pay the levy. In turn this means the government now faces a £23bn hole.
The main rates of capital gains tax were increased at the October Budget from 10% to 18% for basic-rate taxpayers, and from 20% to 24% for higher rate taxpayers.
For another week or so, sellers can benefit from capital gains tax at 10%, after 6 April 2025, the relief is being reduced so that gains are taxed at 14%, and from 6 April 2026, qualifying assets will be subject to tax at 18%.
Young said the government had not taken into account a phenomena known as the Laffer Curve which means that small amounts in tax rises can put large amounts of people off investing.
She said: “Government instead aimed to hit the sweet spot with a smaller 4% rise in the top rate of CGT. But there are indications that the government has grossly underestimated how behaviours would have been impacted by the tax rises and cuts to relief for entrepreneurs announced in October 2024, and may receive less than expected.
“Higher rates of capital gains tax might deter people from investing in growth assets in the first place, potentially depriving them of higher long-term returns, while at the same time undermining demand for the UK stock market. All of which form the foundation of the government’s stated objectives.”
Young predicted that Reeves might look at the rules around capital gains tax and inheritance.
She said current rules mean there are no capital gains tax payable on death, and the beneficiaries will only have to pay it on any increase in value of an asset after death.
“This prevents double taxation in the form of both CGT and IHT when someone dies but it does encourage people to sit on gains during their lifetime and avoid making lifetime gifts of assets.”
The Institute for Fiscal Studies (IFS) have called for the uplift to be scrapped, with economists tentatively suggesting that the annual cost of it is about £1.6 billion.
The expert added: “Capital gains tax 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. 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.”
