Inherited Property Could Face £120k CGT Bill Under Proposed Tax Reforms

Potential £120,000 Tax Hit on Inherited Properties

Families and property investors could face substantially higher Capital Gains Tax (CGT) bills if proposed government reforms are adopted, according to analysis from wealth manager Rathbones. Two key proposals are under discussion: abolishing the CGT uplift on death and aligning capital gains tax rates with income tax rates.

Under current rules, inherited assets are rebased for CGT purposes when someone dies, meaning gains accumulated during the deceased's lifetime are effectively wiped out. However, if this relief were removed, beneficiaries would face significant tax liabilities when selling inherited property.

Rathbones' analysis demonstrates the potential impact. A family inheriting a property that has appreciated by £500,000 over 25 years could face a CGT bill of approximately £119,280 when eventually selling the asset, assuming a 24% CGT rate. For a £300,000 gain, the estimated liability would be £71,280, whilst a £150,000 gain would result in a £35,280 bill.

Compounding Wealth Transfer Concerns

The prospect of removing CGT uplift on death coincides with other upcoming tax changes that are creating concern among wealth planners. From April 2027, unused pension funds will be brought within the scope of inheritance tax for the first time.

Ed Wood, Financial Planning Director at Rathbones, warned of the cumulative impact: "For many families, the removal of CGT uplift on death would feel like a one-two punch. Not only could inherited wealth be subject to inheritance tax, but beneficiaries could also face a CGT bill on gains that accrued during their loved one's lifetime."

Beyond the financial burden, Wood highlighted a practical concern for executors managing estates. Reconstructing decades of ownership history, locating original purchase records, and calculating the cost of long-forgotten improvements could prove extremely challenging—particularly at an already difficult time for grieving families.

Alignment with Income Tax Rates Could Add Thousands

Another proposal under consideration would align CGT rates with income tax rates, potentially increasing the top rate to 45% for additional-rate taxpayers. This change would significantly impact property investors and business owners.

According to Rathbones' calculations, an additional-rate taxpayer realising a £50,000 gain outside tax-efficient wrappers could face a tax bill of £21,150, compared with £11,280 under the current regime—an increase of nearly £10,000. Higher-rate taxpayers would also be affected, with a £50,000 gain attracting £18,800 in tax rather than £11,280 today.

Even basic-rate taxpayers would see modest increases. A £10,000 gain would generate a tax bill of £1,400, up from £1,260 currently.

Kirsty Cartwright, Investment Director at Rathbones, noted: "For higher and additional-rate taxpayers, aligning CGT rates with income tax rates could add thousands of pounds to the tax bill on a single disposal. For business owners, landlords and long-term investors, any reforms could have implications not only for investment returns, but also for succession planning."

Protecting Wealth Through Tax-Efficient Planning

Whilst speculation about future tax changes has prompted clients to review their positions, experts advise against allowing tax considerations to drive investment decisions in isolation. Making full use of available allowances and tax-efficient wrappers such as ISAs and pensions remains critical regardless of policy changes.

One approach gaining traction among wealth planners is agreeing a CGT budget with clients, allowing gains to be realised in a measured way whilst reinvesting into opportunities better aligned with their objectives and risk profile.

For investors concerned about potential changes, reviewing current holdings and understanding exposure to future tax liabilities through tools like R2SA hotspot analysis and BTL investment assessment may help identify opportunities aligned with post-reform scenarios. Given the speculation surrounding CGT reform, now may be an opportune moment to review personal tax planning strategies with qualified advisers.

Source: Property Industry Eye.