Capital Gains Tax On Death Is Coming

The tax recovery to pay for Covid-19 has started.  In July, Rishi Sunak instructed the Office for Tax Simplification (OTS) to conduct a report into the efficiency and underlying government policy to share taxation in a proportionate manner for Capital Gains Tax.

The OTS has this week published its report and it is clear what the target is.

As it stands today:

For non-property related disposals

• 20% Basic rate tax payers pay 10% on taxable capital gains on none property related gains e.g. stocks and shares.
• 40% higher rate and 45% additional rate tax payers pay 20% on taxable capital gains on none property related gains e.g. stocks and shares.
• Transfer between spouses is free of capital gains tax.

For residential property related disposals

• 20% Basic rate tax payers pay 18% on taxable capital gains on residential property related gains.
• 40% higher rate and 45% additional rate tax payers pay 28% on taxable capital gains on residential property related gains.
• Transfer between spouses is free of capital gains tax unless a mortgage is outstanding on the property where additional stamp duty may be payable for the transfer of value.
• On death, no capital gains tax is payable when ownership is transferred from the deceased to the new beneficiary and the value of the property is revalued at the date of death/transfer to the new value.  The assumption being that inheritance tax may be payable of 40% - but indeed it may not.

Have you spotted the weaknesses in the above? The OTS clearly has with the following suggestions:

• Capital gains rates for all should return to what they used to be i.e. taxed at your highest income tax rates but what about Indexation Allowance?  This was the revaluation for inflation that you used to get previously when CGT was payable at income tax rates.  Indexation allowance ended in 2008 for individual gains and 2018 for company gains.
• On death, the OTS suggests that CGT should be payable anyway even if inheritance tax is due.  This is because many properties currently lose any liability to CGT on death and if there is no inheritance tax to pay on the estate, then there is no tax on the increased value i.e. beneficiaries benefit from an increased value property that never paid any gains taxes or inheritance taxes.  This is low hanging fruit and ensures that all investment property will be liable to capital gains tax on disposal in life or death if cgt becomes payable on death.

The cynics that we are, CGT changes are on the way and holding property now is even less attractive than it was for income tax, capital gains or inheritance tax purposes.  We are calling it the covid-19 tax or the coronavirus tax.