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In March, Chancellor Rishi Sunak froze the threshold at which you pay both inheritance tax (IHT) and capital gains tax (CGT) for five years. Rebecca O’Connor, Head of Pensions and Investments at Interactive Investor, said: “Both taxes are going to gradually take more and more of our money.”
Many still believe that inheritance tax and capital gains tax are only for the rich.
However, Sunak’s decision to freeze them both until fiscal year 2025/26 (and possibly beyond) will be a game-changer.
As the value of property, stocks and other assets increases, more and more ordinary people will find themselves paying the IHT and CGT.
Worse yet, planning is tricky, as both taxes are very complicated and need to be simplified, experts say. Yet this is what the Treasury refused to do.
Inheritance tax is levied on the full value of your assets upon your death, which includes your house, stocks, Isas and other valuables except your pensions.
It is charged at a punitive rate of 40% on wealth over £ 325,000, although Principal Residence Allowance means you can pass on an additional £ 175,000 of the value of your primary residence to your direct descendants without IHT.
It might sound generous, but last week we revealed that the average owner of a £ 270,000 property could be required to pay the IHT over the next few years.
IHT was originally intended for the very wealthy, but they can afford expensive tax planning to escape a bill, ordinary people too often find themselves in a bind.
Which means that they are the ones who get bitten.
Yet Sunak has spoken out against the reform, even though the Office for Tax Simplification has looked at ways to get this messy tax in order.
READ MORE: Homeowners’ inheritance tax nightmare – £ 270,000 average property risk
HM Revenue & Customs (HMRC) plans to raise £ 9.2 billion in CGT this fiscal year. By 2026/27, the government expects that figure to double to almost £ 20 billion a year.
Again, it’s very complex, with different brackets depending on what asset you’re selling and your income tax bracket, but the long overdue reform has been scrapped.
The only good news is that the Treasury hasn’t raised CGT rates, said Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
However, reform is still urgently needed. “The CGT is in urgent need of simplification,” she said, adding that the failed reform of the IHT was another missed opportunity.
This is a missed opportunity for taxpayers, not for HMRC.
Revenues from both taxes are expected to increase steadily over the next five years. So plan now to reduce your exposure or risk a shock bill in the years to come.
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