Simple CGT change in first Burnham Budget could raise billions
Chris Etherington, private client tax partner, RSM UK said: “The chancellor is expected to look at capital gains tax (‘CGT’) changes to help restore some of the fiscal headroom, but a simple increase in tax rates could backfire and reduce revenues. An alternative approach of removing the forgiveness of CGT at death, meaning that capital gains would not be effectively wiped out on death, is more certain to raise funds in the short-term and could generate more in tax receipts in the future.
“There has been lots of speculation that the chancellor has an increase in CGT rates up his Budget sleeve, but that could be acting as a distraction to a much more reliable CGT revenue raising measure. Radical changes to the CGT regime are not without risk, as substantial changes to the CGT rules can also change taxpayer behaviour. Given the limited time the chancellor has had in office, it would be prudent to take time beyond the Budget to evaluate his options, rather than rush through complex CGT reform that could backfire.
“There is however one change to the CGT rules that could be introduced in the Budget that’s certain to raise tax receipts in the short-term and generate more substantial revenues in future. There are very few perks to passing away, but one potential advantage is that any capital gains on assets held at death are effectively written off. One reason for this is it makes things easier from an administrative perspective, as those inheriting an asset just need to know what its market value was at the date of death in order to calculate any capital gain on a future sale.
“The rule can lead to some peculiar outcomes, as a gift made during someone’s lifetime could be subject to both CGT and inheritance tax, particularly if the donor dies within seven years of making the gift. That can result in individuals holding onto assets, as no such double charge arises if the asset is passed on at death instead. The rules can potentially deter someone from gifting or selling an asset during their lifetime.
“The chancellor could be tempted to change this rule so that if someone inherits an asset, they also inherit any capital gain associated with that asset. That doesn’t mean that CGT would be payable on death, but it could be due if the inherited asset is sold in future. To avoid any administrative difficulties calculating the future gain, it’s likely that some sort of mechanism would be needed to agree the deferred capital gain with HMRC at the date of death. So even if no tax was payable at that time, those selling the asset in the future would know the amount of capital gain passed on to them.
“It’s difficult to forecast how much extra tax would be generated if the chancellor goes down this route. Given there’s currently no need to submit information about capital gains at death to HMRC, any forecast of future tax receipts is likely to be somewhat speculative.
“In its analysis of the rules in November 2020, the Office of Tax Simplification outlined that HMRC had undertaken some research and estimated that in the short-term, CGT receipts could increase by an average maximum amount of around £900m over a five-year period*. This assumes that around a third of people would sell assets following someone’s death, and crystallise a CGT liability as a result. Given that the data relating to capital gains is historic and based on a main CGT rate of 20%, rather than the current 24%, it seems reasonable to assume that the estimated maximum additional receipts in the short-term will now be at least £1bn.
“The annual increase to CGT revenues is likely to increase steadily over time, as the other two-thirds of inherited assets are periodically sold by those who have inherited them. HMRC’s previous analysis suggested that the additional tax revenues could increase to £1.6bn over a 20-year period, based on the asset values at the time. Again, considering the main CGT rate has since risen to 24% and assuming asset price increases, it does not seem unreasonable to estimate that that additional CGT receipts could exceed £2bn a year over a 20-year period.
“To sweeten the pill, the chancellor could also announce in this Budget a reversal of the changes to inheritance tax relief on agricultural and business assets that were fully introduced in April this year. These rules have already been subject to change since they were originally announced in the 2024 Budget, but still present a commercial challenge and distraction for successful privately owned businesses in the UK. That potential quid pro quo would mean businesses and farms could be passed on without incurring a tax liability on death, but more CGT could be payable on a future sale.
“So, while it’s still far from certain that death and taxes will be a theme for this Budget, it’s easy to see why the chancellor could be tempted to reform the CGT rules on inherited assets to fill a funding gap.”