The new Labour Government has warned that the UK’s 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 £10bn to £25bn, in addition to the £8.6bn of revenue raising measures announced in the Labour manifesto.
Laura Hayward, tax partner at professional services and wealth management firm Evelyn Partners, said 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.’
Among other expert industry views views, accountants and business advisers James Cowper Kreston said the UK Government should, at least for the time being, ignore calls to adopt a flat 30% rate of pension relief.
It will, the firm says, be horrendously complicated to implement and is likely to hit key public sector employees, such as doctors and teachers.
Stephen Barratt, a partner in the Private Client Services team at James Cowper Kreston said: “The proposal is deceptively simple. It is easy to understand why a flat rate of 30% appears attractive as it might encourage lower earners to save more. But it would penalise those earning over £50,270 because their relief would be reduced from 40%/45% to 30%.
“The law of unintended consequences could see such a move penalise public sector workers, particularly doctors and increasingly teachers, with the Institute of Fiscal Studies suggesting one in four teachers set to be higher rate tax payers by 2027. Politically, that would be very difficult for the Labour government to justify.
“Critically, these proposals would be enormously complicated to implement, especially where pension contributions are made by employers and perhaps even more so in the case of members of final salary schemes. e might find that 20% taxpayers miss out on the additional 10%.
“The Labour government has set out an ambitious programme of reform. Whilst tax on pensions might be something to consider, it is essential that the consequences of any change are properly thought through.”
