IHT and CGT allowances to rise at a lower rate

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The government has announced that two tax-free allowances will rise in line with the Consumer Prices Index rate of inflation, rather than the more generous Retail Prices Index rate.

The inheritance tax (IHT) nil-rate band and the capital gains tax (CGT) allowance have previously risen in line with RPI, which is typically higher than the CPI as it contains extra payments such as council tax and mortgage interest.

This means that in future the tax-free allowances will rise by a smaller amount each year. The announcement follows many similar moves by the government of switching between the inflation measures to save itself some money, such as changing public sector pension increases from RPI to CPI.

The IHT nil-rate band is currently £325,000, meaning that assets up to that amount will not be hit with the 40% tax on death.

The nil-rate band is frozen until April 2015. But in draft legislation unveiled today for next year's Finance Bill, the allowance will rise in line with CPI instead of RPI from the 2015-16 tax year.



The legislation says that the increase in the CPI "from one September to the next [will be] used to calculate the increase in the nil-rate band for the following year".

It adds: "Automatic indexation of the nil-rate band using the CPI will remain subject to override if parliament determines a different amount should apply."

The draft Finance Bill also revealed that while the CGT annual exempt amount (AEA) will remain at £10,600 for the 2012-13 tax year, after that it will rise in line with the CPI instead of the RPI, unless the government overrides it.

"Freezing the AEA forms part of the package of measures to freeze tax and benefits thresholds as part of the government's commitment to tackle the budget deficit," the draft bill said.


"The switch to CPI from RPI from 2013-14 reflects the government's decision to move the underlying indexation assumption for all direct taxes to CPI."

The Treasury says that increasing the CGT allowance at a lower rate could lead to around 60,000 more individual tax returns with a CGT liability being submitted between 2012-13 and 2015-16.

It also reveals that the proportion of men paying CGT will remain relatively stable, with men making up around 60% of CGT payers. "Those aged between 45-50 and 55-60 years are most likely to file a return that includes a capital gain," the Treasury adds.

This article was written for our sister website Money Observer