Reeves ‘should charge capital gains tax on second homes and inherited businesses’

Rachel Reeves has been urged to start charging capital gains tax on second homes and businesses after their owners die.

Abolishing the exemption that eliminates capital gains tax charges on death would simultaneously drive economic growth and raise £2bn a year for the Treasury as the chancellor struggles to plug a £22bn budget black hole , according to the Institute of Fiscal Studies (IFS).

The think tank’s head of tax, Helen Miller, said: “It’s a bad tax break and I’d love it if the government scrapped it.”

Arun Advani, associate professor at the University of Warwick, said: “It would be good for growth. It would stop this problem of people clinging to goods they don’t actually really want. And it would be good from a revenue perspective.

“It would be strange if HMRC and the Treasury did not put this to the Chancellor.”

Capital gains tax is levied on profits from the sale of assets such as shares or second homes, at a rate of around 20% for a higher rate taxpayer, depending on the asset.

However, under the existing system, if a person does not sell during their lifetime and instead holds the asset until death, they can avoid paying tax altogether due to an exemption known as ‘growth on death’.

This means that no capital gains tax is charged during the period of ownership, although some assets are still subject to inheritance tax.

The person who inherits the asset does so at its current market value. This means that when they sell, they will only pay capital gains tax on the increase in value since they took ownership.

Any revision would spark accusations that the chancellor is double-taxing the inheritance.

However, speculation is growing that there will be a broad crackdown on capital gains in next month’s budget.

Investment bank Citi said on Friday it expected a package of tax increases in the Autumn Statement on October 30, which would raise an extra £15bn to £25bn a year and include reforms to capital gains tax.

Ms Reeves could feasibly raise “high single-digit billions” from an overhaul of the capital gains tax system, including bringing top rates in line with income tax rates, Ms Miller said.

However, she added that if Ms Reeves raises rates, she must also reform the tax to make it less distortive.

Ms Miller said aid hampered economic growth because it encouraged people to hoard businesses and property to death. She said: “It’s a massive incentive not to sell.”

Mr. Advani added, “This capital does not support the growth of the economy.”

Giving up the exemption will become even more important if the chancellor plans to raise capital gains tax rates, Ms Miller said, as higher rates will create an even greater incentive to hold on to assets until death.

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Removing the exemption would bring in an extra £2bn a year for the Exchequer by the end of this parliament, according to the IFS, but that number would be even higher if Ms Reeves raises key rates.

The exemption also encourages people to pass on businesses to their children rather than consider a sale, which is also bad for the economy, Mr. Advani said.

If a person keeps the business until they die, not only will their capital gains be wiped out for tax purposes, but their heir will also benefit from inheritance tax relief, which is worth up to 100% of the business assets, such as shares in an unlisted company.

Mr Advani said: “The empirical evidence is that children tend to run businesses worse than their parents did. So it’s actually better delivered from a growth perspective.”

A Treasury spokesman said: “Following the spending audit, the chancellor has been clear that tough decisions are ahead on spending, welfare and tax to fix the foundations of our economy and tackle the £22 billion hole which the government inherited. Decisions on how to do this will be made at the budget in the round.”

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