Inherited families could face Capital Gains Tax (CGT) debts of almost £120,000 under potential changes being discussed by policymakers, according to analysis from Rathbones.
The firm’s calculations suggest that ending the long-standing CGT levy on death would leave beneficiaries paying tax on capital gains during a relative’s lifetime when they eventually sell the estate.
A family that inherits a home that has increased in value by £500,000 over 25 years could face a CGT liability of £119,280, given the current 24% CGT rate, says Rathbones.
The proposal has emerged as speculation continues about potential changes to CGT under the Andy Burnham government, with policymakers looking for ways to raise more tax revenue.
At present, inherited assets are generally reclassified for CGT purposes when someone dies, meaning that any gains built up during the deceased’s lifetime are removed. Removing that exemption would mean that beneficiaries would inherit the original purchase price for tax purposes, greatly increasing the taxable gain when the property is sold.
Rathbones estimates that inherited assets with a lifetime gain of £150,000 will generate a CGT liability of £35,280, rising to £71,280 on gains of £300,000 and £119,280 on gains of £500,000.
Ed Wood, Director of Financial Planning at Rathbones, said the change could come as families prepare for the inheritance tax changes that will come into effect next year.
“For many families, the removal of the CGT uplift on death can feel like a one-two punch,” he said. “Not only could inherited wealth be exempt from inheritance tax, but beneficiaries could face a CGT liability on benefits that accrued during their loved one’s lifetime.”
He added that the proposed changes could also create practical difficulties for managers, who may need to track down decades-old purchase records, calculate historical development costs and find initial acquisition costs before properties are settled.
The analysis comes as unused pension funds are due to be brought under inheritance tax from April 2027, raising concerns among advisers that more of the wealth of generations could be taxed.
Rathbones also examined the potential impact of aligning CGT rates with the income tax rate, another change that has been widely discussed.
Under the measure, additional rate taxpayers could see the capital gains rate rise from 24% to 45%. On £50,000 of taxable profit from tax-free overseas savings accounts such as ISAs and pensions, the CGT bill will rise from £11,280 to £21,150, a further £9,870.
Higher rate taxpayers will also face much bigger bills, with the CGT benefit of £50,000 rising from £11,280 to £18,800 under the firm’s figures.
Kirsty Cartwright, Director of Investments at Rathbones, said that while speculation about tax changes has prompted useful planning discussions, investors should avoid allowing tax considerations alone to dictate investment decisions.
“The important thing is not to let the tax shake the investment dog,” he said. “Whatever policy changes may come, making the most of available grants and tax-free rollovers such as ISAs and pensions remains as important as ever.”
Current CGT rates are 18% for most basic rate taxpayers and 24% for higher and additional rate taxpayers, with an annual exemption of £3,000. No changes in government have been announced.
