Rachel Reeves has been urged to start charging capital gains tax on second homes and businesses after their owners die.
Scrapping relief that wipes out capital gains tax charges on death would simultaneously drive economic growth and raise £2bn a year for the Treasury as the Chancellor scrambles to fill a £22bn budget black hole, according to the Institute for Fiscal Studies (IFS).
The think tank’s head of tax, Helen Miller, said: “It is a bad tax relief and I would love it if the Government scrapped it.”
Arun Advani, associate professor at the University of Warwick, said: “It would be good for growth. It would stop this problem of people hanging onto assets that they don’t actually really want. And it would be good from a revenue perspective.
“It would be weird if HMRC and the Treasury weren’t pitching this to the Chancellor.”
Capital gains tax is charged on the profits on the sale of assets such as shares or second homes, at a rate of around 20pc for a higher rate taxpayer, depending on the asset.
However, under the existing system, if a person does not sell during their lifetime and instead holds the asset until they die, they can avoid paying the tax altogether because of a relief known as “uplift on death”.
This means that no capital gains tax is charged on their period of ownership, although some assets are still liable for inheritance tax.
The person who inherits the asset does so at its current market value. This means that when they sell, they will only pay capital gains tax on the increase in value since they took ownership.
Any overhaul would trigger accusations that the Chancellor is double taxing inheritance.
However, speculation is growing that there will be a wide-ranging crackdown on capital gains in next month’s Budget.
Investment bank Citi on Friday said it was expecting a package of tax rises in the Autumn Statement on October 30 that would raise an extra £15bn to £25bn a year and include reforms to capital gains tax.
Ms Reeves could feasibly raise “high single digit billions” from an overhaul of the capital gains tax system, including bringing the headline rates in line with income tax rates, Ms Miller said.
However, she added that if Ms Reeves increases the rates, she must also reform the tax to make it less distortionary.
Ms Miller said the relief holds back economic growth because it encourages people to hoard businesses and property until they die. She said: “It is a massive incentive not to sell.”
Mr Advani added: “That capital is not supporting growth in the economy.”
Scrapping the relief will become even more important if the Chancellor is planning to raise capital gains tax rates, Ms Miller said, because higher rates will create an even bigger incentive to hold onto assets until death.
Scrapping the relief would bring in an extra £2bn for the Treasury per year by the end of this parliament, according to the IFS, but this number would be even bigger if Ms Reeves increases the headline rates.
The relief also incentivises people to pass on businesses as inheritance to their children, rather than considering a sale, which is also bad for the economy, Mr Advani said.
If a person holds onto their business until they die, not only will their capital gains be wiped for tax purposes, but their inheritor will also benefit from business relief on inheritance tax, which is worth up to 100pc on business assets, such as shares in an unlisted company.
Mr Advani said: “The empirical evidence is that kids tend to run businesses worse than their parents did. So it is actually better off being passed on from a growth perspective.”
A Treasury spokesman said: “Following the spending audit, the Chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22bn hole the Government has inherited. Decisions on how to do that will be taken at the Budget in the round.”
