Inheritance tax to hit 54.4% in Labour’s double death tax Budget raid | Personal Finance | Finance
Starmer and chancellor Rachel Reeves have been softening us all up for a string of tax hikes, to justify raiding the nation’s wealth in the upcoming autumn Budget. An inheritance tax (IHT) blitz now looks inevitable.
Reeves may be tempted to cut IHT gifting allowances, further reducing the amounts people can pass onto loved ones free of tax.
She might also cut the £325,000 nil-rate threshold, which has already shrunk in real terms having been frozen since 2009.
Or she may axe the £175,000 main residence allowance, cutting IHT due when passing on the family home to children and grandchildren.
Small businesses seem likely to pay more IHT even though many could be wiped out as a result.
Reeves has one more trick up her sleeve. Currently, people don’t pay capital gains tax (CGT) on death, only IHT. Now she looks set to charge families BOTH.
Chris Etherington, private client partner at RSM UK, has done the sums and reckons this will lift the IHT rate from an already punitive 40% to as high as 54.4%.
While Labour ruled out some tax hikes in its manifesto, Etherington notes that it has left itself free to review both IHT and CGT rules.
One change is oven ready, having already been drawn up by the now-disbanded Office of Tax Simplification (OTS).
In 2020, in a report prepared for former chancellor Jeremy Hunt, the OTS recommended the CGT annual exemption could be cut.
Hunt duly slashed it from £12,300 to £3,000 a year.
The OTS didn’t stop there. It also noted that when someone dies, any CGT charge on asset gains are wiped out.
This spares beneficiaries a “dual hit” of both IHT and CGT.
Many families currently use this in their favour.
Gifts made during someone’s lifetime may trigger a CGT charge. So when somebody gifts a second property, antiques, jewellery or shares held outside of the tax-free Isa allowance, they may have to pay CGT on any gain in its value.
If they then die within seven years, the beneficiary may pay IHT as well.
Some therefore hang onto assets, knowing any CGT exposure is scrapped on their death, helping them avoid paying tax twice.
The OTS didn’t like this and suggested removing the CGT “death uplift” entirely. And this has handed Reeves a tax hiking opportunity on a plate.
If she takes it, grieving families would face a double tax charge, paying both CGT and IHT on the same asset.
Etherington shows how this would work in practice, using the example of someone owning a rental property with a net value and capital gain of £100,000.
Currently, high rate taxpayers pay 24% CGT on property, so this could trigger a liability of up to £24,000,
Etherington said: “The remaining £76,000 might then be subject to IHT at a rate of up to 40%, giving rise to a further tax liability of up to £30,400.
“Taken together, the two taxes would amount to £54,400 and an effective tax rate of up to 54.4% at death.”
That’s frightening, but in line with what we are learning about Starmer and Reeves, who are itching to attack inherited wealth.
Etherington says it could raise much-needed funds for their spending plans. Plus it has anything attraction.
“Given the complexity of the rules, it is unlikely to be as well understood as a simple change in tax rates and might appear a safer political path to tread.”
He said it would “undoubtedly result” in more families paying more tax when loved ones die. Which as you can imagine, will suit Reeves and Starmer just fine.
Worried? Here are some options for avoiding Labour’s autumn Budget CGT raid.
