As chancellor Rachel Reeves revealed a significant £22bn deficit in public finances last month, it is likely that the upcoming October Budget will see some form of tax increases. With national insurance, income tax, and VAT already ruled out, Labour might turn to inheritance tax (IHT) and capital gains tax (CGT) to fill the financial gap, although specific details are yet to be disclosed.
The current scenario shows IHT at record levels, with HMRC statistics indicating a record £6bn in IHT liabilities in the 2021-22 tax year, marking a 4% increase from the previous year. Approximately 4.4% of deaths now result in an IHT charge, the highest proportion since 2016-17. Additionally, IHT receipts from April 2024 to June 2024 totaled £2.1bn, an £83mn rise from the same period in 2023.
The continuous surge in IHT can be attributed to escalating property prices alongside frozen IHT tax-free thresholds. This has essentially led to a stealth tax hike, where inflation diminishes the value of assets that individuals can pass on to their beneficiaries without incurring tax liabilities.
Currently, individuals can pass on up to £325,000 before facing IHT, with the possibility of boosting this threshold by an additional £175,000 through the residence nil-rate band (RNRB) for those leaving their home to descendants. In total, a couple can transmit up to £1mn exempt from IHT. However, if these bands had been adjusted for inflation, a couple could have potentially passed on an estate worth £1,423,000 combined after the second person’s demise.
On the other hand, the latest CGT data presents a mixed picture. In the 2022-23 tax year, CGT liability amounted to £14.4bn, reflecting a 15% decline from the previous year. This decrease was partly influenced by a sluggish property market, marking an exception to the long-term upward trend. Notably, a small percentage of taxpayers – just 1% – made gains of £5mn or more, accounting for 41% of total CGT.
Recent adjustments to the CGT allowance, halving it to £3,000 and previously reducing it from £12,300 to £6,000, have impacted higher-income taxpayers cashing in investments. While it is advised not to make hasty decisions based on potential tax increases, investors considering realizing gains may contemplate doing so sooner. If a CGT raise is implemented, there is a likelihood that the announcement may be delayed until the Spring Budget to provide investors with a limited timeframe to sell assets before the tax changes take effect at the beginning of the new tax year.