Stealth taxes are rising – here’s how to protect your money before 5 April
Niche taxes like inheritance tax and capital gains tax are fast becoming major cash cows for the treasury. Here’s what to do before the end of the tax year
Britain’s stealth tax is accelerating, with more people being pulled into the net without realising it.
The government is collecting more from capital gains tax (CGT) and inheritance tax (IHT) than ever before, with receipts expected to rise sharply over the next five years.
According to the Office for Budget Responsibility (OBR), IHT alone is forecast to leap from around £8.7bn this year to as much as £14bn by the end of the decade. CGT is on a similar trajectory, with receipts expected to almost double to more than £25bn over the same period.
In other words, these once “niche” taxes are fast becoming major cash cows for the Treasury and aren’t just affecting the wealthy.
And it’s not happening by accident – this is being driven by a series of policy decisions that are widening the net.
Frozen thresholds, reduced exemptions, higher rates and rising asset values are all playing a part. Over time, they are reshaping who pays these taxes and how much they pay.
IHT is a clear example. The main threshold has been stuck at £325,000 since 2009 and is due to remain there until at least 2031, while the £175,000 tax-free figure for leaving the family home to children or grandchildren hasn’t budged since 2021. As property prices and investment portfolios grow, more estates are crossing that line.
This is fiscal drag in practice. As values rise but thresholds do not, more people are drawn into paying tax without any change to headline rates. It tends to happen gradually, which makes it less visible, but the effect builds over time. The upcoming reforms to farms, businesses, pensions and AIM shares will further boost the Treasury’s IHT take.
CGT is a further example. The annual tax-free limit was hacked from £12,300 to £3,000 in just two years. Investors making relatively modest gains can now find themselves facing a tax bill where previously none existed, and a bigger one given CGT rates on sales of shares were jacked up in 2024.
At the same time, many people are not making full use of the allowances available to them. Interactive Investor research shows that three in four Brits do not know the tax year ends on 5 April, leaving millions at risk of missing opportunities to protect their money.
What to do now
With the deadline approaching, there are still practical steps that can make a difference.
Pensions and ISAs remain two of the simplest and most effective tools for beating the CGT raid. You can invest up to £20,000 each tax year in ISAs, and any growth, dividends or interest is shielded from HMRC. Once the tax year ends, that allowance is gone.
Pension contributions benefit from upfront income tax relief and investments grow in a tax-efficient environment and can also reduce a current CGT liability if profits have pushed you into the higher threshold.
If you hold investments outside these wrappers, it can help to plan how and when you realise gains. Making use of your CGT allowance each year, even at its lower level, can limit the risk of larger tax bills down the line. Couples can also share assets between them to make better use of both allowances.
When it comes to IHT, early planning tends to be more effective than last-minute decisions. Gifting during your lifetime can reduce the value of your estate – sometimes immediately, other times potentially – and there are annual exemptions that can be used regularly. Taken together over time, these steps can ease the eventual tax burden.
Rising CGT and IHT receipts may feel like something happening in the background, but the impact is becoming harder to ignore. More people are being affected, often without realising it until a bill arrives.
With the 5 April deadline falling on Easter Sunday this year, now is the time to act. Using the allowances available and making a few considered decisions now make a meaningful difference to your future.
Craig Rickman is personal finance expert at interactive investor