Wealth managers react to the latest figures from HM Revenue and Customs – showing another rise in inheritance tax IHT. Capital gains tax also jumped over the last year and wealth managers suggest ways of mitigating tax liability. The government is expected to go further on IHT and CGT in the October budget.

The latest figures from HM Revenue and Customs (HMRC) released this week show that inheritance tax receipts hit £4.3 billion in the six months from April to September 2024.

This is £400 million higher than the same period in the previous tax year and continues the upward rise over the last two decades. The last full tax year, inheritance tax raised £7.499 billion. Currently one in 20 estates are liable, but that may be about to change if the budget rumours prove correct.

Capital gains tax data released this week, charged on the profit made when investments are sold, also shows that receipts have jumped 16 per cent over the last year, from £572 million in the last three months to 30 September from £492 million in the same quarter of 2023 as residential landlords sell assets ahead of the budget.

Inheritance tax
IHT receipts are continuing to grow, driven in large part by frozen nil-rate band thresholds and rising asset prices, continuing the upward trend seen over the last two decades. UK chancellor of the exchequer Rachel Reeves has also said that the government will have to increase taxes in the October budget, sparking concerns that she will go further with the inheritance and capital gains tax side.

Inheritance tax is charged at 40 per cent above a threshold on the estate of a deceased person, currently set at £325,000. About 4 per cent of families must pay it, as most estates have fallen under the nil rate band, as the threshold is called. If the deceased was married or in a civil partnership, the assets they leave to a spouse or civil partner are not subject to IHT, regardless of the value of the deceased's estate.

Reeves is expected to go further on the inheritance tax side in the October budget, for example making it more difficult to gift money and assets, such as farmland, tax free. Currently, no inheritance tax is due on gifts if they are made by a person who lives for more than seven years after the gifts were made but this could be extended to 10 years. Individuals can also claim up to 100 per cent relief on the inheritance of agricultural land if it is being actively farmed. Another possibility that has been cited by analysts would be to scrap business relief, which enables an individual to pass on a company or shares if it is unlisted with 100 per cent tax relief. It would also include AIM shares, making pensions subject to inheritance tax.

“Business Relief helps family-owned businesses pass between generations as well as encouraging investors to invest in young, fast-growing businesses – whether that’s on AIM or through starts ups qualifying for the enterprise investment scheme (EIS). Removing the relief would decimate smaller, family-owned businesses, while also making backing smaller companies less attractive,” Nicholas Hyett, investment manager at Wealth Club, said. 

“Removing the IHT free status of pensions will also be damaging. It is in any government’s interest that people can support themselves in retirement. Constantly changing the rules puts people off saving in a pension, whether they are rich or poor. All government’s need to balance short and long-term priorities. Throwing the kitchen sink at IHT may be good politics in the short term, but it risks doing long-run damage,” he added.

“The steady annual rise in IHT receipts has been ingrained in recent years as inflation has dragged more assets and more estates over the frozen nil-rate bands. Any changes aimed at increasing the IHT taken beyond this fiscal drag effect are likely to reap outsize results over the coming years as the Baby Boomer generation reaches average mortality,” Laura Hayward, tax partner at professional services and wealth management firm Evelyn Partners, continued.  

"So it’s no surprise IHT is at the centre of budget speculation again, with firm reports claiming business and agricultural property reliefs will be reformed and the gifting rules revamped. We have spoken to many people this summer who were bringing forward plans to gift substantial assets, not just to start the seven-year clock ticking, but also to pre-empt an expected CGT rise,” she said. 

'It’s not out of the question that the chancellor could also look at the nil-rate bands, as the residential NRB has come under criticism for discriminating against those who can’t or don’t want to leave their main property to a direct descendant,” she added.  

Capital gains tax 
“CGT receipts for the three months up to and including September were 16.3 per cent higher than the same period of 2023, which must be a result of not just the much-reduced annual exempt allowance but also investors realising gains over the last year ahead of an expected increase in the rate of CGT,” Hayward said.

‘It looks like CGT is going up, with the only question being “how high?” she continued. “But the Treasury faces some difficult trade-offs around a CGT hike, as the tax receipts illustrate. If the chancellor announces on 30 October a rate rise to come in on 6 April 2025, that will prompt thousands of investors to realise an avalanche of gains in the subsequent five months. That will boost tax revenues in the 2024/25 tax year but CGT takings could drop off dramatically in the following year,” Hayward added.  

‘We surveyed UK business owners recently and found that 29 per cent had accelerated business exits in the last year, and most of those did so because of concerns over an increase in CGT,” she said. See more commentary here. 

“Whichever way, the prognosis for tax revenues in the medium to long term from higher CGT rates is uncertain at best – according to HMRC’s own analysis – and it threatens to weaken business investment,” she added. “Taxing inflationary gains – as occurs currently – is widely regarded as punitive, so it seems sensible that any CGT rate increase should come with an adjustment for inflation, either through an indexation allowance or by taper relief, before being taxed,” Hayward continued. 

“Finally, there is the possibility that the CGT at death uplift rule will be reformed, meaning that beneficiaries inherit assets not at the value at death, but at the value the deceased first purchased them at, with the CGT liability that entails. That could be a significant hike on the taxation of assets at death,” she said.

Her views were echoed by Lubbock Fine Wealth Management, the wealth management arm of Lubbock Fine, chartered accountants and business advisors. LFWM said that some individuals who are sitting on capital gains have been rushing to sell their assets to avoid the rumoured CGT increase in the Labour Budget.

If the rate of CGT does increase on 30 October, residential property investment strategies geared towards generating a profit quickly such as buying a rundown property and then renovating, will be a lot less attractive as the resulting capital gain will be subject to more tax. A rise in CGT could mean less money being invested in refurbishing and improving the UK’s stock of residential property, LFWM continued.

Part of the recent rise in CGT take is also from the hit that investors have taken from the reduction in the CGT tax free allowance. In 2023/24, the CGT tax-free allowance fell from £12,300 to £6,000. For 2024/25, it has fallen even further to £3,000. Many investors with smaller investments are now finding that their capital gains are caught by CGT.

Görkem Barron, Chartered Financial Planner at LFWM said that if the rate does increase substantially, it may also lead to a lower total CGT take for HMRC as investors may just hold their property until the event of their death at which point there would be no CGT to pay.

“A series of tax and legislation changes has already made owning rental properties less attractive and the likely possibility of a CGT hike has been the catalyst for many landlords to sell off their properties ahead of the budget to avoid paying more tax. “Investors are clearly very concerned that if they sell after the budget they are going to be hit with a much bigger CGT charge,” Barron added.

The threat of CGT rises highlights the importance of moving assets into tax-efficient vehicles such as ISAs and pensions This rise in CGT is also likely to hit investors in shares. Ahead of the budget, Barron believes that investors should consider putting shares that are more likely to generate capital gains in independent savings accounts (ISAs) or pensions.