Capital gains tax changes Burnham could make and the consequences experts warn of
As Andy Burnham appears to be heading unchallenged towards Number 10, all eyes are on him and his closest allies for clues about their political agenda.
While the Makerfield MP has made it clear that he will stick to Labour’s manifesto and pledge not to increase core rates of income tax, VAT or national insurance, he has previously made it clear that he believes wealth is under-taxed in the UK.
This has fueled speculation that he could make changes to capital gains tax if he becomes the next prime minister.
Speculation has been fueled by hints from senior figures, including one of Burnham’s allies and a Labor Party politician tipped for a larger cabinet role in his government, who have openly called for reform of capital gains tax, which is paid on profits made on the sale of assets.
Potential reforms they have discussed include bringing the tax rate in line with income tax and removing the death benefit rules, which could bring inherited family homes into the scope.
See: Wealth Tax Options
Summary: What is CGT?
Capital Gains Tax (CGT) is charged on the profit you make on the sale, gift or disposal of an asset that has increased in value, such as shares, property or valuables. You pay tax on the profit, not the sales price.
In the UK, basic rate taxpayers typically pay 18% and higher rate taxpayers typically pay 24%.
CGT typically applies to personal property worth £6,000 or more, second homes, some main homes, investments outside ISAs and pensions, and certain business assets.
Individuals have an annual tax-free allowance of £3,000 (£1,500 for most trusts). But with benefits frozen for several years (and remaining so for another three years), rising asset values mean more people are being caught up in paying CGT.
HMRC data shows CGT receipts reached a record £22.2 billion last year, up from a previous high of £16.9 billion in 2022-23.
What is the rule for recovery in case of death?
Under the step-up-on-death rule, you will likely pay less CGT on assets you inherit, such as the family home.
This rule means that when someone dies, the value of most of their assets is based on the market value on the date of their death, rather than on the date the deceased bought them, for CGT purposes. Any increase in value over their life is effectively ignored for future CGT calculations.
Instead, CGT is levied on profits made from the time of death to the time the inherited party sells it, meaning you may not have to pay CGT if you sell the asset for its value.
What can change?
Raising capital gains tax rates
One change could be to raise capital gains tax rates to bring them more in line with income tax rates.
If Burnham were to bring those rates in line with income tax rates (20%, 40% or 45%), many people selling assets would be faced with much higher tax bills.
Wes Streeting, who is rumored to be in the running for chancellor if Burnham becomes prime minister, has proposed the move to raise more money for government coffers.
He told the BBC the change aims to remove an unfair system that “penalizes work” and will encourage investment by offering lower CGT rates to “real” entrepreneurs.
Another close Burnham ally, former transport secretary Louise Hay, also recently supported the idea in an article for Renewal magazine.
She wrote that the levy “should be moved closer to income tax rates” to “shift the tax burden away from punishable work.”
“This reform is critical to restoring confidence that the system does not favor those who can structure their income over those who earn their living through work,” she added.
Various think tanks, including the Institute for Public Policy Research, have also supported the idea, saying it would create a fairer tax system and raise billions of dollars to support government services.
But experts warn that policymakers may overestimate how much extra income higher CGT rates will actually bring in, as raising them will also force people to change their behavior.
In June 2024, HMRC estimated that increasing the higher CGT rate by one percentage point in the next tax year would only generate around £110 million by 2027-28.
It was also estimated that a 10 percentage point increase in the higher rate would actually reduce tax revenue by around £2 billion by the third year as taxpayers change their behaviour.
“Punitive CGT rates risk becoming self-defeating as investors delay selling, hold on to assets they might otherwise sell, restructure their affairs or curtail investment activity altogether,” says Jason Hollands, managing director at asset manager Evelyn Partners.
“If the UK were to move to 40% or 45% rates for higher CGT rates, it risks becoming significantly less competitive than many comparable European countries. This will discourage investment, entrepreneurship and the recycling of capital into new businesses and productive capabilities.”
An analysis by investment platform IG warned that making the change could cost the government around £7.8bn a year by causing investors to delay selling assets.
“Bringing capital gains tax in line with income tax rates will not only make investing less attractive, but will also be financially counterproductive,” said Michael Healy, managing director of IG UK and Ireland.
Refusal of “exaltation due to death”
The idea of repealing the rise-on-death rule was also put forward by Louise Haig.
In her article, she wrote: “At a minimum, reforms should eliminate specific loopholes, such as raising the capital gains tax on death, which allows unrealized gains to escape taxation entirely.”
The idea was previously supported by a research group at the Institute for Fiscal Studies, which said in 2024 that it should be removed “as a priority”.
This could mean that inherited family homes and other inherited assets could face higher tax bills when they are sold.
Here’s an example based on Evelyn Partners calculations:
Your mum bought her house for £100,000 and when she died its value rose to £200,000. You inherit a house with a base value of £200,000 and sell it for £200,000. You will not have to pay CGT.
However, if this premium were eliminated and you decided to sell the house for £200,000, the basic cost would only be £100,000 and, after deducting the annual CGT allowance of £3,000, you would have a taxable gain of £97,000 and would be subject to tax at 18% or 24%. That’s a tax bill of £17,460 or £23,280.
If CGT rates were raised even further, this bill would be even higher.
“This will be a major concern for those who own their own businesses or farmers, as shares or assets are currently passed down at an increased value, so the gain on immediate sale upon death will be nominal,” said Gary Smith, partner in financial planning at wealth management firm Evelyn Partners..
Of course, it’s important to remember that none of these changes have been confirmed yet, and experts urge people not to make spontaneous decisions based on rumors.
Three ways to protect yourself from CGT
Meanwhile, Evelyn Partners’ Hollands has outlined some tips to help you reduce your CGT bills under the current rules.
1. Maximize ISA Use
The most effective long-term protection against CGT is through the use of tax wrappers such as ISAs and pensions.
“Investors holding shares or funds outside of an ISA should consider whether a Bed & ISA strategy is suitable.” This involves selling investments, ideally not exceeding the annual CGT exemption of £3,000, and then buying them back into an ISA so that future profits – and income – are protected from tax,” he said.
2. Make full use of interspousal transfers
Assets can usually be transferred between married couples and civil partners without triggering a tax liability.
“Inter-spousal transfers allow couples to take advantage of both annual CGT exemptions and ISA benefits, which can help optimize family tax efficiency.
“Even if it is not possible to completely eliminate exposure to taxable gains, transferring investments, where necessary, into the name of a spouse who pays tax at a lower rate than their partner before disposal can potentially reduce the overall CGT bill when the gain is realized,” he added.
3. Take advantage of the annual tax exemption rather than letting profits accumulate.
The annual CGT exemption is much smaller at £3,000 than before, but it is still valuable.
“Many investors lose sight of this, allowing unrealized gains to accumulate over many years. Regularly crystallizing profits as part of the annual exemption can help reduce the accumulation of significant hidden tax liabilities over time,” he said.