Capital gains tax on death could see families double taxed on estates

The new Government has warned that the public finances are in a worse state than expected before the election, with growing pressures from public sector pay in particular coming up against budgetary black holes that Chancellor Rachel Reeves has suggested will be revealed on Monday.

That ‘spending audit’ will set the scene for an Autumn Budget that is increasingly expected to feature tax rises in some form or other, with one independent analyst warning that taxes could rise by anything from £10billion to £25billion, in addition to the £8.6billion of revenue raising measures announced in the Labour manifesto.[1]

Laura Hayward, Tax Partner at professional services and wealth management firm Evelyn Partners, says that the capital gains tax treatment of assets on death could be lined up for reform:

‘While the Labour manifesto stated there would be no increase to the basic, higher, or additional rates of income tax or to national insurance, it made no mention of capital gains tax. Labour has stuck to a line that there are “no plans” to increase CGT, but stopped short of ruling that out.

‘However, several Labour MPs have voiced their views that the rates of CGT should be raised, with some backing a raise to bring it in line with the rates of income tax. With the new Government suggesting public finances are more stretched than publicly available data shows, CGT could be a target. One option is to change the tax treatment of assets on death.

‘Currently, although the value of an individual’s estate - minus any reliefs - may be subject to IHT, it is not liable for CGT on the accrued gains, and the beneficiaries of the estate are deemed to acquire the asset at market value. This means that when the asset is later sold, only gains from the value at date of death may be taxable.

‘Various reports over the years have made recommendations on reforming this CGT rule on death, either charging CGT on the gains at point of death, or making the beneficiary liable for all of the capital gains on assets inherited, back to the base cost when they were purchased.[2]

‘The Budget will be closely watched for any changes made to the CGT rules on death. A forceful option open to the Chancellor would be to apply CGT to the assets in the estate, treating them as disposed of on death, in which case it is likely that the estate would have to pay the CGT bill. The beneficiaries would be affected indirectly by the reduced value of the estate, as is the case for IHT. With this option the estate could struggle to fund CGT charges without making actual sales.

‘A more gradual and possibly more likely option would be for the assets to be received by the beneficiaries with the base cost remaining as their purchase cost, rather than the value on inheritance. In this case the beneficiary would have to pay CGT when they chose to sell the asset. This option would give more flexibility in timing the CGT charge, and would mean that the beneficiary would have the sale proceeds to pay the CGT with.

‘Either would be complicated to administer, particularly when working out the purchase costs for the assets belonging to the deceased. Charging CGT on top of IHT could give rise to very substantial tax bills, if there was no offset between the two.

‘To illustrate the impact of the changes, and assuming no exemptions are available, take a shareholding purchased for £20,000 but now worth £50,000. Currently, if the owner dies then if the estate sold them for that value no CGT would arise. If they were passed to a beneficiary, then on any sale the base cost would be £50,000, and the gain or loss would be calculated from that.

‘If the CGT uplift was removed, then under the first option discussed above the estate would have to pay CGT on a £30,000 gain. They could then be passed on to the beneficiary with the new base cost of £50,000, as under the current rules. If the second option, where the estate does not automatically pay CGT, was taken, then the estate would only pay CGT if it sold the shares. If they were passed to a beneficiary, then that beneficiary’s base cost on which to calculate a gain or loss on eventual sale would be the original cost of £20,000.

‘The 40% rate of IHT would also be due on these shares in the estate if they did not fall within the nil rate band.

‘These changes would have most impact on families who currently fall within the IHT net, where estates are large enough to have substantial assets other than a family home and cash. Presumably the CGT exemption for family homes would apply to the sale of that property by an estate, or an uplifted base cost would be passed on to the inheritor, but neither of these are certain.

‘A Labour Government could also consider changes to CGT rates. CGT is not a big revenue raiser, with the OBR estimating that total CGT receipts would be £15.2 billion in 2024/25, which represents 1.3% of all receipts. However, a CGT rate rise could certainly form part of a package of measures to increase tax revenue, and it is quite possible that Labour could look to increase rates of CGT at the next Budget.’

NOTES
[1] Michael Saunders, Oxford Economics
[2]
Office for Tax Simplification – where a relief or exemption from IHT applies, consider removing CGT uplift on death. Also consider removing CGT uplift on death more widely. Person inherits asset at original base cost.
https://www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-by-design

APPG - no CGT uplift. No immediate tax on death of donor, but on death, the beneficiary inherits at the donor’s base cost.
STEPReform_of_inheritance_tax_report_012020.pdf

IFS - abolish the uplift of capital gains at death. The report favours treating death as a disposal event, with the CGT liability passed to the estate to pay.
https://ifs.org.uk/articles/raising-revenue-closing-inheritance-tax-loopholes

Demos - removing the CGT uplift and charging CGT when the asset is sold.
Demos

ENDS 
  
Disclaimer  
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.  
Issued by the Evelyn Partners group of companies (the 'Group') which comprises Evelyn Partners Group Limited and any subsidiary of Evelyn Partners Group Limited from time to time.   
© Evelyn Partners Group Limited 2024   
   
About Evelyn Partners   
We are a wealth management and professional services group, created following the merger of Tilney and Smith & Williamson in 2020. With £61.8 billion of assets under management (as at 31 March 2024) we are one the largest UK wealth managers and are also the seventh largest UK accountancy firm ranked by fee income (source: Accountancy Age 50+50 rankings, 2023). Evelyn Partners was named Accountancy Firm of the Year in the 2023 City AM Business Awards.   
We have a network of offices across 29 towns and cities in the UK, as well as the Republic of Ireland and the Channel Islands. Through our operating companies, the Group offers an extensive range of financial and professional services to individuals, family trusts, professional intermediaries, charities and businesses.   
Our purpose is ‘to place the power of good advice into more hands’, and we are uniquely well-placed to support clients with both their personal financial affairs and their business interests. Our personal wealth management services include financial planning, investment management and advice, personal tax advice and, through Bestinvest, an award-winning online investment and coaching service for self-directed investors. For businesses, our wide range of services includes assurance and accounting, business tax advice, employee benefits, forensic advice, fund administration, fund governance, recovery and restructuring and transaction services.    
For further information please visit: www.evelyn.com