Capital taxes

Another turn of the screw

Mr Osborne’s new-found favourite percentage – 1% – cropped up in the capital taxes area as well as income tax and benefits:

  • Inheritance tax The Chancellor announced that the nil rate band would rise by 1% in 2015/16, to £329,000. It had been frozen at £325,000 by Alistair Darling in 2009 until 2014/15, a plan the new Government quietly adopted. Once again, this is a delayed sub-inflation increase (the band is now ultimately meant to be CPI-linked). Had the nil rate band been index-linked to RPI from April 2009, in April 2013 it would be rising to about £365,000.
  • Capital gains tax Mr Osborne froze the CGT annual exempt amount for the current tax year. In the Autumn Statement he said the exemption would increase by 1% in 2014/15 and again in 2015/16 to £11,100. Work backwards and it would appear the 2013/14 exemption will be £10,900, an increase in line with CPI inflation.

These nominal increases imply that more people will be dragged into the inheritance tax net and there will be a rise in the numbers of CGT payers. Fiscal drag – in other words, ignoring the full impact of inflation with the aim of covertly collecting a bigger slice of national income – is a manoeuvre much beloved of Chancellors of all political hues. In the long term, however, reliance on fiscal drag brings into question the credibility of the tax system.

14th December 2012