As we pass one month of a new Government, and wait in anticipation for the autumn Budget, speculation continues to mount about how Labour will raise the funds needed to meet its election pledges. 

With promises not to touch income tax, VAT or National Insurance, the latest rumours swirling around Westminster are in relation to a potential ‘double death tax’: a Capital Gains Tax (CGT) and inheritance tax (IHT) double whammy.  

Current rules

Under current rules, upon death, a person’s estate is subject to inheritance tax, but not capital gains tax. And, as inheritance tax only kicks in once the value of the estate is over £325,000, many people don’t fall within its scope (especially when you take into account additional allowances for a main home including who the beneficiaries are).

CGT is paid on the sale of specific assets. This currently does not include your main home unless you have rented it out, used it for business purposes or it is very valuable. 

As the annual exempt amount on CGT is £3,000, any profits that fall below this amount are not subject to tax. This means that the Treasury is missing out on billions of pounds of tax on assets that are not subject to CGT and fall below the IHT threshold. 

How might the ‘double death tax’ work?

Until now, IHT has been the only tax concern of the beneficiaries of an estate. If property or assets are inherited by a loved one, any capital gains those assets may have made, are, in effect, wiped out. 

CGT is only then applied when those assets are sold at a later date and the CGT is only calculated on profit made from the increase in value from the point of inheritance to the time it is sold. 

One idea that has been voiced in the past is the idea of categorising property and assets as being disposed of at the point of death, rather than when the asset is sold. Being categorised in this way would subject property and assets to CGT at the point of inheritance rather than at the point of sale.

If property and assets were treated in this way and CGT charged on them at the point of inheritance, then the remaining value of those assets would be subject to IHT.

So, for example, if someone dies owning a property with a capital gain value of £100,000, this could face a CGT of 24% which would be a tax value of £24,000. 

The remaining £76,000 would then be subject to IHT of 40% which would be a tax value of £30,400. This would create a total ‘double death tax’ bill of £54,400 which is 54% of the original gain.

Different calculations would be made for different assets based on their varying rates of taxation, but you can see how using both CGT and IHT together could potentially work to raise funds for the Government. 

There are different opinions about how this could work in practice. There is the view that trying to implement these charges at the point of inheritance could be logistically difficult for the Treasury and expensive for the beneficiary. Others suggest that there could be a less aggressive approach to collecting the tax, where the capital gain is still calculated from the original purchase cost, but only charged when the asset is sold, not when the asset is inherited, allowing the beneficiary to have the funds in hand to pay the tax. 

There is some thought that, because this ‘double death tax’ could be a relatively complicated approach to collecting more tax and less obvious than a direct tax increase, it might be a political option worth exploring when it comes to raising funds. 

This could be made even more complicated if, as we discussed in our last newsletter, the Government decides to harmonise CGT and income tax rates. [See last week's blog: Here's what we know so far: CGT]

Even though we don’t know what eventual changes might come, it’s worth understanding any potential impact of change. One of the benefits of being aware of this potential change is to start to think about how you could manage your estate and pension plans to enable you to make the most of your assets both for now and for anyone who may inherit them in the future.

If you have any questions about any of this or would like to discuss your own situation in more detail, then please contact us. We are ready and willing to discuss how we can support and advise you about how potential changes to CGT and IHT could affect you. 

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See also our first blog in this series: Here’s what we know so far: Pensions