The capital gains tax changes Burnham could make - and the consequences experts are warning about

With Andy Burnham seemingly heading unchallenged to Number 10, the spotlight is on him and his closest allies for clues about their policy agenda.

While the Makerfield MP has made it clear that he will stick to Labour's manifesto pledge not to raise the main rates of income tax, VAT or national insurance, he has previously made it clear that he believes wealth in the UK is undertaxed.

This has sparked rumours that he could make changes to capital gains tax if he becomes the next prime minister.

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The speculation has been spurred on by hints from senior figures - including one of Burnham's allies, and a Labour politician tipped for a big cabinet role in his government - who have openly called for capital gains tax, which is paid on profits made when selling assets, to be reformed.

Potential reforms they have discussed are: bringing the rate paid in line with income tax and removing the uplift-on-death rules, which could see inherited family homes brought into its scope.

Recap: What is CGT?

Capital gains tax (CGT) is charged on the profit you make when selling, gifting or disposing of an asset that has increased in value, such as shares, property or valuable possessions. You pay tax on the gain, not the sale price.

In the UK, basic-rate taxpayers generally pay 18% and higher-rate taxpayers 24%.

CGT usually applies to personal possessions worth £6,000 or more, second homes, some main homes, investments outside ISAs and pensions, and certain business assets.

Individuals have a £3,000 annual tax-free allowance (£1,500 for most trusts). But with allowances frozen for several years - and set to remain so for another three - rising asset values mean more people are being drawn into paying CGT.

HMRC data shows CGT receipts reached a record £22.2bn last year, up from the previous high of £16.9bn in 2022.

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What is the uplift-on-death rule?

Under the uplift-on-death rule, the likelihood is you will pay less CGT on assets that you inherit, like a family home.

The rule means that when someone dies, the value of most of their assets is based on the market value on the date they died - and not the date the deceased bought it - for CGT purposes. Any increase in value during their lifetime is effectively ignored for future CGT calculations.

Instead, CGT is levied on gains made from the time of death to the time the inherited party sells it, meaning you might not have to pay any CGT if you sell the asset for what it is worth.

What could change?

Hiking capital gains tax rates

One change could be to hike capital gains tax rates to make them more closely aligned with income tax rates.

If Burnham were to align these rates with income tax brackets (20%, 40%, or 45%), many individuals selling assets would face a much higher tax bill.

Wes Streeting - rumoured to be in the running for chancellor should Burnham become the prime minister - suggested that this move should be made to raise more money for the public purse.

He told the BBC the change would address an unfair system that was "penalising work" and would encourage investment by offering lower rates of CGT to "genuine" entrepreneurs.

Another close ally of Burnham, former transport secretary Louise Haigh, also recently backed the idea in an article for the journal Renewal.

She wrote that the levy "should be brought closer to income tax rates" to "shift the taxation burden away from punishing work".

"This reform is central to restoring confidence that the system does not favour those able to structure their income over those earning through work," she added.

Various thinktanks, including the Institute for Public Policy Research, have also backed the idea, saying it would create a fairer tax system and raise billions to support public services.

But experts have warned that policymakers might overestimate how much extra revenue higher CGT rates would actually generate because increasing them will also cause people to change their behaviour.

In June 2024, HMRC estimated that increasing the higher rate of CGT by one percentage point in the following tax year would raise only around £110m by 2027-28.

It also estimated that increasing the higher rate by 10 percentage points would actually reduce tax receipts by around £2bn by the third year because taxpayers would change their behaviour.

"Punitive CGT rates risk becoming self-defeating because investors delay disposals, retain assets they might otherwise sell, restructure their affairs or reduce investment activity altogether," says Jason Hollands, managing director at wealth manager Evelyn Partners.

"If the UK were to move towards rates of 40% or 45% for higher rates of CGT, it would risk becoming significantly less competitive than many comparable European countries. That would discourage investment, entrepreneurship, and the recycling of capital into new businesses and productive opportunities."

Analysis by investment platform IG has warned that making this change could cost the government around £7.8bn a year due to investors deferring asset sales as a result.

"Aligning capital gains tax with income tax rates would not only make investing less attractive but would also prove fiscally counterproductive," said Michael Healy, managing director of UK & Ireland at IG.

Scrapping the 'uplift on death'

The idea of axing the uplift-on-death rule has also been floated by Louise Haigh.

In her article, she wrote: "At a minimum, reforms should address specific loopholes, such as the capital gains tax uplift at death, which allows unrealised gains to escape taxation entirely."

The idea has previously been backed by the research group 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 calculations by Evelyn Partners:

Your mum bought her house for £100,000 and when she died the value had increased to £200,000. You inherit the home at a base cost of £200,000 and you sell it for £200,000. You wouldn't have to pay any CGT.

However, if this uplift was removed and you opted to sell the house for £200,000, the base cost would only be £100,000 and, after the deduction of the £3,000 annual CGT allowance, you would have made a taxable gain of £97,000 and tax at 18% or 24% would be payable. That's a tax bill of £17,460 or £23,280.

If CGT rates were raised further, that bill would be even higher.

"This would be a major issue for those who own their own businesses or farmers, as currently the shares or assets are inherited with the uplifted value, so the gains on an immediate post-death sale would 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 have urged people not to make knee-jerk decisions over rumours.

Three ways to protect yourself against CGT

In the meantime, Hollands from Evelyn Partners has set out some tips for helping you reduce your CGT bill under the current rules.

1. Maximise the use of ISAs

The most effective long-term protection against CGT is to use "tax wrappers" like ISAs and pensions.

"Investors holding shares or funds outside an ISA should consider whether a 'Bed & ISA' strategy is appropriate. This involves selling investments, ideally not exceeding the annual £3,000 CGT exemption, and then repurchasing them within an ISA so that future gains - and income - are sheltered from tax," he said.

2. Make full use of interspousal transfers

Assets can normally be transferred between married couples and civil partners without triggering a tax liability.

"Interspousal transfers enable couples to make use of both annual CGT exemptions and ISA allowances, which can help optimise family tax efficiency.

"Even where exposure to a taxable gain cannot be eliminated entirely, transferring investments, where appropriate, into the name of a spouse who pays tax at a lower rate than their partner, ahead of a disposal can potentially reduce the overall CGT bill when gains are realised," he added.

3. Use the annual exemption rather than allowing gains to accumulate

The annual CGT exemption has become much smaller at £3,000 than it used to be, but it is still valuable.

"Many investors overlook it, allowing unrealised gains to build up over many years. Regularly crystallising gains within the annual exemption can help reduce the build-up of substantial latent tax liabilities over time," he said.

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