Thousands of families could be left facing a tax bill of almost £120,000 when they inherit and later sell a loved one’s home if ministers adopt controversial reforms.
Wealth manager Rathbones says proposals to change Capital Gains Tax that have been widely discussed by tax experts could deliver a costly double blow to families already grappling with inheritance tax changes. The analysis comes amid growing speculation that an Andy Burnham-led government could look at raising extra revenue through further CGT reforms.
Under current rules, people inheriting assets such as property benefit from a so-called “CGT uplift”, meaning the asset’s value is effectively reset at the date of death. This wipes out capital gains built up during the deceased’s lifetime.
But if that relief was abolished, beneficiaries would inherit the original purchase price instead and CGT would be charged on the full increase at the time of the sale. That would potentially leave them with a huge CGT tax bill.
Rathbones calculates that someone inheriting a family home which has risen in value by £500,000 over 25 years could face a CGT bill of £119,280 when it is sold, assuming today’s 24% tax rate remains in place.
Even more modest gains could prove expensive. A gain of £150,000 would generate an estimated CGT bill of £35,280, while a £300,000 gain could trigger a charge of £71,280. The warning comes as families are already preparing for major inheritance tax changes due from April 2027, when unused pension pots are scheduled to become liable for inheritance tax.
Ed Wood, financial planning director at Rathbones, said: “We’ve seen a significant increase in client enquiries about CGT as speculation grows over what fiscal measures a new government might consider to fund its economic agenda. With commitments made on the main tax levers, many investors see CGT as a potentially tempting area for policymakers looking to raise additional revenue.
“However, there is a risk that further increases in the CGT burden could discourage investment at a time when the UK needs private capital to turbocharge economic growth. There is also a question over whether higher rates would ultimately deliver the expected boost to the public finances, as investor behaviour often changes in response to tax increases.”
He added: “For many families, the removal of CGT uplift on death would feel like a one-two punch. Not only could inherited wealth be subject to inheritance tax, but beneficiaries could also face a CGT bill on gains that accrued during their loved one’s lifetime.
“Add in the forthcoming inclusion of unused pension pots within inheritance tax calculations, and there is a growing concern that a much larger slice of intergenerational wealth will end up in the taxman’s coffers.”
Mr Wood also warned the changes could create a bureaucratic headache for bereaved families. He said executors may have to trace decades-old purchase documents, identify the cost of home improvements and calculate historic gains before estates can be settled.
“For grieving families, the challenge may not just be paying the tax, but establishing how much tax is due in the first place,” he said.
The report also examined another reform that has been widely debated – aligning CGT rates with income tax rates. At present, most higher and additional-rate taxpayers pay 24% CGT on many assets, while additional-rate income taxpayers pay 45% income tax.
If the two systems were aligned, Rathbones says an additional-rate taxpayer making a £50,000 gain outside tax wrappers such as ISAs or pensions would see their tax bill jump from £11,280 to £21,150 – an increase of £9,870.
A higher-rate taxpayer making the same gain would see their bill rise from £11,280 to £18,800, while even basic-rate taxpayers would pay more. Kirsty Cartwright, investment director at Rathbones, said: “For higher and additional-rate taxpayers, aligning CGT rates with income tax rates could add thousands of pounds to the tax bill on a single disposal.
“For business owners, landlords and long-term investors, any reforms could have implications not only for investment returns, but also for succession planning and the transfer of wealth between generations.” She urged investors not to make rushed decisions based on speculation alone.
“The key is not to let the tax tail wag the investment dog. After all, CGT is only payable when you’ve made a profit. Whatever policy changes may come, making full use of available allowances and tax-efficient wrappers such as ISAs and pensions remains as important as ever.”