The Rising Tide of UK Tax: What’s in Store for Wealthy Britons?

The UK economy has had its struggles, bouncing between stagnant and mediocre growth which has been heavy news for the Treasury. However, the summer carried a glimmer of surprising upbeat news for our public coffers, with collected capital gains tax (CGT) reaching a record high.

UK Capital Gains Tax Hits Record High

In the fiscal year ending in April 2022, Britons coughed up £16.7 billion in CGT, representing a remarkable 15% increase compared to the previous year. Concurrently, HMRC also observed a substantial upsurge (20%) in the number of individuals paying this tax. According to HMRC, this increase is due to a rise in the number of residential property sales, as well as larger gains on these transactions.

Unearthing the Reasons Behind the CGT Increase

But why has there been such a rise in CGT? Are rising property prices and increased sales the main causes of this windfall? Some experts, despite the logical connection, aren’t entirely convinced. That’s because CGT liabilities are only incurred when one chooses to sell an asset. The opportunity to accumulate capital gain might be a factor, but experts argue it’s certainly not the lone factor.

Camilla Wallace, a private client partner at Wedlake Bell, reckons fear could be a significant trigger in these disposals of assets. This trend first emerged as wealthy Britons contemplated the possibility of a Jeremy Corbyn-led Labour Party taking over Downing Street. The fear, she explains, has lingered on even under a more moderate Labour leadership.

Even as current Labour leader, Sir Keir Starmer, attempts to put to rest wealthy voters’ fears that a Labour government wouldn’t seize their finances, not everyone appears convinced. The Conservatives, led by Jeremy Hunt, haven’t provided much assurance either. The CGT personal allowance was sliced from £12,000 to £3,000 and the threshold for the highest tax rate was reduced, resulting in earners paying 45% tax on anything above £125,140.

A New Chapter for Capital Gains Tax?

Green energy entrepreneur and Labour donor Dale Vince is currently legal action against ‘carried interest’ – profits kept by private equity fund managers – being treated as capital gains instead of income. This could potentially lead to a broad restructuring of the CGT system.

Despite the uncertainties and rumours of future changes to the CGT legislation circulating, the government’s ultimate decision is far from certain, especially in light of the forthcoming general election.

Increasing Taxation for Wealthy Britons: An Unavoidable Reality?

The tough economic horizon begs the question: is it time for the well-off to reconcile with the idea of paying more taxes? Despite this bleak picture, Wallace reminds wealthy investors not to adopt an overly negative attitude.

Inheritance Tax: The ‘Death Tax’ Effects

Another tax making big headlines is the so-called ‘death tax’. Once a small part of the Treasury’s money-collecting toolkit, inheritance tax has significantly increased over the recent years, rising from just over £2 billion in 2010 to an anticipated £7.2 billion this fiscal year.

A major driver of this increase has been something known as the ‘fiscal drag effect’. This is when the threshold for a certain tax remains frozen – as has the inheritance tax’s nil rate of £325,000 since 2008 – while the value of assets escalated.

Exploring Lesser-Known Inheritance Tax Relief Options

Despite the increase, some affluent Brits are looking to lesser-known options for relief. These include taking advantage of agricultural and woodlands reliefs, which seem to be gaining popularity partly due to the rewilding and ESG trends. These reliefs can provide significant benefits for the next generation, in more than just financial means.

An increasingly popular method is the Family Investment Company (FIC). Established under the Companies Act 2006, an FIC is a company that invests on behalf of the family member shareholders. As any growth is shared or transferred to the shareholders, including a family trust, it can reduce the estate of the founder for inheritance tax purposes.

Essentially what all this indicates is both tax scenarios – CGT and Inheritance – are complex and fluid. Whether wealthy Britons will face higher total tax bills in the near future depends on various factors. These include house prices, their investment decisions, and not least, the decisions made by our politicians. It’s a challenging terrain, but with careful navigation, and perhaps some professional advice, it’s one that can be successfully traversed.