Britons warned to beware of the widening CGT and IHT double tax trap

Autumn Statement: Key announcements from Jeremy Hunt

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Unveiling the Autumn Statement to the House of Commons on November 17, Chancellor Jeremy Hunt announced a raft of tax allowance freezes as among the measures to fill a £50billion fiscal hole caused by the Conservatives’ earlier mini-budget. Amongst the list of increases, Mr Hunt confirmed the annual exemptions for capital gains tax will be reduced over the next two years, presenting inheritors with a greater chance to fall into a “double tax trap”, experts at interactive investor have warned.

Inheritance tax is charged on a person’s estate, such as property, money, and possessions if the total value exceeds £325,000. This is the current tax-free threshold for the 2022-23 financial year.

The estate figure is confirmed after the value of the person’s assets are added together and if the total assets exceed £325,000, a 40 percent tax is applied to the rest of the estate.

However, to swerve the hefty tax bills, people can pass down wealth using the seven-year rule. This is a ‘gift exemption’ and enables people to pass on money of any value without incurring a tax bill, as long as they don’t die within seven years of the transfer.

What many people forget, experts at interactive investor warn, is that capital gains tax (CGT) is always payable – regardless of whether the seven-year rule plays out or not.

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 Britons will now be paying the taxes. There’s a risk that people could fall foul of the fiddly rules and not know they have an extra tax bill to pay.”

If someone were to give away assets but dies within seven years, they could end up paying both capital gains tax and inheritance tax (IHT) on the same assets. This is arguably a greater issue now, according to interactive investor experts, as the CGT annual allowance is due to be reduced.

The new reforms Mr Hunt will be making to CGT will see the Annual Exempt Amount be cut from £12,300 to £6,000 next year in April 2023, and then to £3,000 from April 2024. With rising inflation and smaller personal allowances, more people are at risk of being dragged into the tax thresholds.

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Ms Guy said: “On current tax treatment, you and your family could be facing up to 49 percent total tax bill for the gifting of shares and up to 57 percent total tax bill if gifting a second property, and that’s even before the new, lower CGT allowances kick in.

“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.”

However, Ms Guy continued: “Inheritance tax is charged on assets when you die, and it’s completely separate from CGT, meaning you could end up paying both.”

READ MORE: Martin Lewis warns 800,000 pensioners missing out on up to £3,500

She explained: “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 IHT on the gift, even if you’ve already paid CGT.”

To put this into context, according to Ms Guy, if someone gave away a second home worth £300,000 that they bought for £100,000 they would have a profit of £200,000 and a taxable gain of £187,700 (the annual allowance of £12,300 reduces the gain).

If they then died within three years, their estate would owe inheritance tax on the full £300,000, assuming they had used up their allowances. The giver would owe £52,556 CGT on the gain as CGT is charged at 28 percent on second properties and their estate would owe £118,800 IHT after they die, giving a staggering total tax bill of £171,356.

However, it’s noted it’s important to get tax advice as the rules are complicated and depend on your individual circumstances.

Commenting on the new rules, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said: “Entrepreneurs are being penalised with the increase in taxes on both capital gains and dividends, and those people who have diligently invested over the long term to build up their financial resilience will no doubt feel unfairly swiped by this grab from profits.

“Investors who hold money in funds or shares outside a pension or an ISA will face a greater tax burden, which is a reminder of the value of ISAs in protecting investors from having to consider CGT or dividend tax.”

Jason Hollands, managing director of Bestinvest weighed in: “Those with shares or funds outside of tax-efficient wrappers like ISAs and pensions should urgently consider migrating these into ISAs. This is a process known as ‘Bed & ISA’ and involves selling the shares or funds held and then repurchasing them with an ISA.

“When selling, care needs to be taken not to exceed the annual capital gains exemption. Until the end of this tax year, gains of up to £12,300 can be crystallised tax-free, so there is a limited window of time to make use of this more generous allowance.”

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