Recent media reports have suggested Rachel Reeves may be urged to start charging capital gains tax on businesses and second homes after their owners die, removing the existing tax-free uplift on death.
This uplift rebases assets to their market value at the death of the owner, so that there is no, or little, taxable increase in value for CGT purposes when assets are sold shortly after death or transferred to a beneficiary.
IHT is still payable on the value of those assets at the owner's death, but reliefs such as business property relief may also reduce or eliminate this tax.
The concern is that this uplift in value encourages business owners to retain businesses until death rather than either selling them or implementing an appropriate business succession plan during their lifetime.
Retaining businesses for tax reasons longer than is otherwise commercial can result in poor financial outcomes.
Some businesses fold or are sold by beneficiaries shortly after they inherit them.
There are also concerns that second homes may be hoarded in a similar way.
However, second homes do not benefit from IHT relief as businesses do, so such hoarding is less likely to be purely tax-based.
What solution has been suggested?
The Institute for Fiscal Studies has suggested that the practice of hanging on to these assets for tax reasons is bad for economic growth, and that withdrawing the tax-free uplift might be beneficial in removing the incentive to do so.
The IFS's comments on this came as part of a discussion of how the chancellor might raise £20bn of tax.
As the government ruled out raising the rates of income tax, national insurance or VAT in its election manifesto, and pledged not to raise corporation tax rates during its first parliament, it is now constrained.
The IFS recognises it would not make sense to simply raise the rates of CGT without overhauling the CGT rules more fundamentally. A simple increase in tax rates may further encourage people to hoard assets until death.
To avoid this, either some form of taper relief or indexation would be required to recognise the impact of inflation on asset values, or the higher rate would have to be restricted to future gains to avoid accusations of retrospective taxation.
Either of these options would increase the complexity of an already complex tax.
The IFS suggests CGT should be overhauled more thoroughly, and that the withdrawal of the tax-free uplift on death should be considered as part of this.
However, the IFS also recognises that CGT on its own can come nowhere close to raising the £20bn required by the government, so much wider-ranging tax reforms are required.
Would withdrawing the tax-free uplift on death as part of a reform of CGT have a beneficial effect on the UK's economic growth?
From a business perspective, it might encourage owners to make decisions about succession on purely business grounds.
