Investment firm Interactive Investor has warned Brits they could be dragged into the tax net following Jeremy Hunt’s changes to the capital gains (CGT) and inheritance tax (IHT) regimes within his Autumn Statement.
The UK government announced IHT nil-rate bands will remain frozen for an additional two years – on top of the freeze already in place since April 2021 – until 2028, despite having remained the same since 2009. At the same time, the CGT annual exempt amount will be slashed in half twice in the next two years: from £12,300 ($14,594, €14,204) to £6,000 in April 2023 and then to £3,000 from April 2024.
While these reforms aim to tackle increased spending and debts incurred during the pandemic, as well as the current energy and cost of living crises and high inflation, the recent changes could result in a “double tax trap” where people will have to pay CGT and IHT on the same asset(s), Interactive Investor said.
Wealth that is passed down is usually subject to the IHT ‘seven-year rule’, where, if the giftor lives for seven years after giving the money, no inheritance tax will be applicable.
But the same rule does not apply to capital gains, which is always payable regardless of when wealth is passed down, and it applies to gifts as well.
In fact, if an individual gives away assets and dies within seven years, they will be liable for both IHT and CGT.
This means a 49% tax bill for gifting shares and a 57% tax bill for gifting a second property, without taking into consideration the lower CGT allowance that will kick in from next year, the platform explained.
Double whammy
Alice Guy, personal finance editor at Interactive Investor, said: “Capital gains tax and inheritance tax used to be a tax for the very wealthy, but the long-term freezing and now reducing of allowances means that more and more ordinary Brits will now be paying the taxes. There’s risk that people could fall foul of the fiddly rules and not know they have an extra tax bill to pay.
“Many people don’t realise that CGT is charged on gifts, even to children or unmarried partners. The gain is based on the market value of the gift minus the original purchase price. Shareholders and property investors are particularly affected as they have often seen huge increases in value if they’ve owned their assets for a long time. Your main home is usually exempt from CGT.
“Inheritance tax is charged on assets when you die, and it’s completely separate to CGT, meaning you could end up paying both. If you die within seven years of making a gift, it will be counted as part of your estate and your beneficiaries could end up owing inheritance tax on the gift, even if you’ve already paid CGT.”
