The Proposed Changes to CGT and Inheritance Tax for 2024/2025
The Autumn 2024 budget has now been delivered, to read about the actual changes announced please click here.
The following article is a detailed report on the proposed changes to Capital Gains Taxation for 2024 and beyond. If instead you would like to read a brief overview of these potential changes please click here.
Since the pandemic subsided, the world has faced a variety of economic problems; high inflation, slow growth and issues in the job market to name a few. The new Labour government has not just inherited a difficult economic environment, but must work out how it is going to pay for the extra expenses the pandemic incurred.
The new Labour government are under significant pressure to reduce the deficit and bolster growth without increasing taxation on the poorest. Chancellor Rachel Reeves has pointed to a £22bn hole in the public finances that she plans to address in her first budget on the 30th October 2024. CGT and IHT could very well be in the firing line. Below are some measures backed by the Office of Tax Simplification (OTS) that will remain on the desk of the new government.
The OTS Reports on CGT and IHT
Any future changes to CGT and IHT are likely to be heavily influenced by the OTS reviews into CGT. The review was requested by Rishi Sunak when he was Chancellor. The outcome of this review was released in 2020, and one recommendation, the reduction of the CGT allowance, has already been actioned.
Although CGT and IHT rates avoided changes for 2023/24, Jeremy Hunt revealed in November 2022 that CGT allowances will be reduced from April 2023 (read on for more). For more information about the reduction in CGT and dividend allowances read our guide here.
More changes may be on the way in now that there is a new government in charge. The OTS report will remain on the desk of the new chancellor and provides some well thought out possible courses of action. If these recommendations come into fruition, there may be significant ramifications for your investments. It may be wise to take some preventative measures, which are listed at the bottom of this article.
The remainder of this article will take you through the recommendations found in the report, as well as some of the steps you could take to mitigate them. It is important to understand that these changes are not guaranteed. However, due to the size and nature of the changes recommended in the OTS report, we believe it is important to be aware of the potential impact they may have on your tax liability in the future.
The proposed changes to CGT
The OTS report of November 2020 contained two major recommendations; to align Capital Gain Tax (CGT) with Income Tax rates and to reduce the CGT allowance. The latter has now been implemented, but the former may still be considered. CGT considerations were also made in an OTS report on Inheritance Tax (IHT) in 2019. This article will also cover recommendations from this report.
It is important to remember that CGT is only paid on any gains you make when you sell assets. This is calculated by taking the original purchase price of the assets you are selling from the amount you are selling the assets for. For example, if you sell assets totalling £30,000, but you bought them originally for £15,000, your gain would be the difference, in this case £15,000. The CGT allowance of £6,000 (for the 2023/24 tax year) can be subtracted from this amount and tax would be charged on the remaining £9,000.
CGT allowance
The OTS report also recognised that many people are avoiding any tax liability by using up their CGT allowance every year. The report recommended significantly reducing the CGT allowance to make sure more gains are captured by CGT. This means the value of assets one can cash in without paying tax could be much smaller. The OTS recommended the new CGT personal allowance be reduced from £12,300 to between £2,000 and £4,000.
Although the Government stated in the March 2021 Budget that the personal allowance for CGT will be frozen until 2026, previous chancellor Jeremy Hunt backtracked on this in his autumn statement. The CGT personal allowance was more halved to £6,000 in April 2023, and halved again to £3,000 from April 2024. This will bring the CGT personal allowance in line with the OTS report’s recommendations.
Scenario A – CGT payable on the sale of £200,000 of assets on which capital gain is £100,000:
| Current rules | Proposed new rules | Potential Increase in Tax | |
|---|---|---|---|
| Asset value | £200,000 | £200,000 | - |
| Capital Gain | £100,000 | £100,000 | - |
| CGT allowance | £12,300 | £3,000 (from April 2024) | - |
| Amount on which CGT Charged | £87,700 | £97,000 | - |
| CGT payable by basic rate taxpayers | £15,786 for property £8,770 for other assets | £19,400 | £3,614 for property £10,630 for other assets |
| CGT payable by higher rate taxpayers | £24,556 for property £17,540 for other assets | £38,800 | £14,244 for property £21,260 for other assets |
| CGT payable by additional rate taxpayers | £24,556 for property £17,540 for other assets | £43,650 | £19,094 for property £26,110 for other assets |
CGT rates
The OTS recommended that CGT rates are brought in line with Income Tax. This could result in a significant increase in CGT rates if this recommendation is implemented. The changes in tax rates could be as follows:
| Proposed changes to Capital Gains Tax | Current CGT rate | Proposed CGT rate |
|---|---|---|
| Basic rate taxpayers | 10% on assets, 18% on property | 20% on assets and property |
| Higher rate taxpayers | 20% on assets, 24% on property | 40% on assets and property |
| Additional rate taxpayers | 20% on assets, 28% on property | 45% on assets and property |
It is also worth noting that the additional rate threshold was been reduced from £150,000 to £125,140 from April 2023.
The ‘no gains, no loss’ approach to Capital Gains and Inheritance Tax
In their 2019 inheritance tax report, the OTS made the case for a ‘no gains, no loss’ approach to CGT in the case of businesses and farms, which are currently exempt from IHT. Under the current rules, inheriting a business or farm is not only exempt from IHT, but effectively exempt from CGT as well. This is because of the ‘CGT uplift’. The CGT uplift is where all assets are re-based when they are received by inheritance. The uplift currently means that the gains made on the value of any assets are ‘wiped out’ when they are passed over as an inheritance.
The OTS judged that where a relief or exemption from inheritance tax applies, the government should consider removing the CGT uplift on the death of the original holder. This means the CGT payable by the recipient of the assets could be payable at the historic base cost paid by the original holder.
For instance, if person A sold assets totalling £300,000 which they purchased at £200,000, CGT would be payable on the difference between the price of purchase and the price of sale. In this case £100,000 (minus their CGT allowance, currently £6,000).
However, if person A were to die and leave their £300,000 of assets to person B, a CGT uplift would set the cost to the value of the assets on the date of death of person A. This would mean person B would inherit the full £300,000 and would not have to pay any CGT in the event of their sale at this price. If the recipient does not sell the assets and they were to appreciate in value, the gains upon the event of their sale would be anything over the price on the day of the original asset holder’s death, e.g. if the assets were sold at £350,000 the taxable gain after deducting the full annual allowance of £6,000 would be £44,000.
Removing the CGT uplift would mean that the taxable gains of the assets are not uplifted to reflect their value on the date of person A’s death. In the above example, person B would inherit the cost to person A (£200,000) and realise a gain on their immediate sale just as person A would have done (£100,000 – with their own CGT allowance potentially being available).
Scenario B – The immediate sale of Inherited Assets totalling less than the Inheritance Tax allowance
The following table shows the CGT liability on the sale of £300,000 of inherited assets for which the original purchaser paid £200,000:
| Current rules | Proposed new rules | |
|---|---|---|
| Inherited asset value | £300,000 | £300,000 |
| Cost to original purchaser | £200,000 | £200,000 |
| Capital gains | £0 | £100,000 |
| CGT allowance | £12,300 | £3,000 (confirmed from April 2024) |
| Amount on which CGT Charged | £0 | £97,000 |
| CGT payable by basic rate taxpayers | £0 | £19,400 |
| CGT payable by higher rate taxpayers | £0 | £38,800 |
| CGT payable by additional rate taxpayers | £0 | £43,650 |
Extending the ‘no gains, no loss’ approach
In their November 2020 report the OTS took the no gains, no loss approach one step further, suggesting that the government remove the CGT uplift for all inherited assets, not just those which are exempt from IHT. This means that both IHT (up to 40%) and CGT (up to 45%) could be applied to the same assets. IHT is a complex area and a full discussion is beyond the scope of this article. Please contact your adviser if you wish to discuss this further.
Scenario C.1 – Inheriting and immediate sale of assets totalling over the Inheritance Tax Allowance
The following tables show the total tax liability of inheriting £1m of assets for which the original purchaser paid £500,000, and selling those assets.
In the first scenario the recipient has to pay IHT, but wants to keep the inheritance as assets rather than in cash. However, they don’t want to be materially worse off after paying the large IHT bill, so decide to sell enough assets to make up the £270,000 they have just paid. Under the new guidance, they would have to sell more than £270,000 to receive this amount, as CGT has to be paid on the sale of these assets.
These figures are assuming a personal CGT allowance of £3,000, which has been confirmed for tax year 2024/2025.
| Current rules | Proposed new rules | |
|---|---|---|
| Inherited asset value | £1,000,000 | £1,000,000 |
| Inheritance tax allowance | £325,000 | £325,000 |
| Inheritance tax payable (assets to be sold) | £270,000 | £270,000 |
| Capital gain | £0 | £500,000 |
| Assets needed to be sold to pay inheritance tax for basic rate taxpayer | £270,000 | £299,333 |
| Assets needed to be sold to pay inheritance tax for higher rate taxpayer | £270,000 | £336,000 |
| Assets needed to be sold to pay inheritance tax for additional rate taxpayer | £270,000 | £346,645 |
| Remaining assets for basic rate taxpayer | £730,000 | £701,367 |
| Remaining assets for higher rate taxpayer | £730,000 | £665,575 |
| Remaining assets for additional rate taxpayer | £730,000 | £655,185 |
Scenario C.2 – If the asset recipient sold the full inheritance
In this scenario the recipient has paid the necessary IHT of £270,000 and decides to sell all of the inherited assets. These figures are assuming a personal CGT allowance of £3,000, which has been confirmed for tax year 2024/25.
| Current rules for all taxpayers | Proposed new rules- Basic rate taxpayers | Proposed new rules- Higher rate taxpayers | Proposed new rules- Additional rate taxpayers | |
|---|---|---|---|---|
| Inherited assets | £1,000,000 | £1,000,000 | £1,000,000 | £1,000,000 |
| Capital Gains allowance | £12,300 | £3,000 | £3,000 | £3,000 |
| Gain | £500,000 | £500,000 | £500,000 | £500,000 |
| Amount on which CGT Charged | £0 | £497,000 | £497,000 | £497,000 |
| CGT payable | £0 | £99,400 | £198,800 | £223,650 |
| Remaining assets after sale | £1,000,000 | £900,600 | £801,200 | £776,350 |
| Net gain from inheritance after IHT of £270,000 paid | £730,000 | £630,600 | £531,200 | £506,350 |
Steps to mitigate the potential changes to CGT
We are not suggesting any action must be taken on the basis of these proposed changes, which are not guaranteed. However, it currently seems like cgt is in the . Therefore, those with larger capital gains in their portfolios, or those intending to pass on significant capital gains in the form of inheritance, could see these changes have a material effect.
As such, it may be a good time to review one’s current position and plan ahead of these proposed changes, especially for higher and additional rate taxpayers. For instance, it may be worth considering moving forward any planned sale of assets to this tax year, or increasing the amount that is sold.
Think about the CGT allowance
Planning in advance for future expenditure is key, this allows the investor to stagger the disposal of their assets and capitalise on their current CGT allowance of £3,000 in the years leading up to the date of planned purchase/expenditure.
Selling a property or business
If capital gains tax rates are aligned with income tax, the tax liability of selling a business or property that is not one’s primary address will get considerably higher. You should speak to your adviser if you plan to make a large asset disposal on which there will be capital gains to pay, as it may be appropriate to bring the sale forward.
Spousal Transfers
Sharing one’s assets with a spouse or civil partner before sale to take advantage of each person’s personal allowance can still be worthwhile, but is now less effective due to the allowance dropping significantly to £3,000. However, transferring assets in this way may still be very worthwhile if the recipient pays a lower rate of income tax, as this could mean the rate of CGT they pay upon their disposal may be lower.
Donate to charity
If CGT is aligned with income tax, the incentive to utilise assets for charitable donations is markedly larger. Not only does one not pay CGT when donating land, property or shares to charity, the value of the donation can be offset against one’s total taxable income. This could reduce an income tax bill.
Make the most of your pension and ISA
Assets held in a pension or ISA are free of CGT and therefore it pays to have as much as possible saved in the tax efficient investments as possible. Making pension contributions will also expand one’s basic rate band. If the expanded basic rate band means you drop down a tax band, it will be possible to take some gains and only pay a lower rate of CGT.
Transfer assets earlier
A potential removal of the CGT uplift could mean recipients of assets via inheritance might have to pay both CGT and IHT. Transferring assets before death may allow the recipient to avoid inheritance tax. This is a complex area and you should take further advice if this is of concern to you.
Brought Forward Losses
Those with significant losses carried forward could consider using them now in case the ability to do this is removed. However, be warned, the ability to carry forward losses could become even more valuable if proposed changes such as increasing CGT rates are made.
Consider Investment Bonds
Life assurance investment bonds offer tax advantages that could be much more valuable if the proposed changes are implemented. Investment Bonds are not subject to CGT and the ongoing taxation can be deferred to a future date or mitigated by assigning segments to lower or non-taxpayers.
In Conclusion
It is not yet known whether some or all of these recommended changes are going to be implemented in 2024 or beyond. It is clear however that the government is going to be looking for new ways to increase its revenues.
Tax increases are never popular with the voters they affect, which is why CGT may be a prime target for increases. The burden of CGT does not fall on the majority of UK citizens, with only around 394,000 people paying in 2021/22. Likewise, with only around 4% of estates currently paying IHT, this may well be considered as a revenue raiser.
These changes are not guaranteed to take effect and this article is not recommending any particular course of action. In most cases, even if all the proposed changes do go ahead, adjustments won’t necessarily have to be made before the next tax year.
If you were planning to sell a property, business or other assets on which there are significant gains within the next few years, it may be worth reviewing your plans within the context of these potential changes. Please get in touch with your adviser if you would like to discuss this further.
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