Energy Prices and Taxes

This morning (Friday 23 August) saw Ofgem reveal the price cap which will apply from 1 October.  As was widely predicted, a typical household's annual energy bill will rise by 10% or £149 to £1,717 a year.  The cap, set by the energy regulator, affects the price paid for each unit of gas and electricity used in 27 million homes in England, Wales and Scotland.

The rise follows two falls this year and will mean prices are still lower than last winter, (c£120 cheaper than 12 months ago).  However, prices are currently expected to rise a little further from the beginning of next year.  Ofgem says prices have risen following higher prices on the international energy market, as a result of increasing geopolitical tensions and extreme weather driving competition and demand for gas, which determines the price of wholesale electricity.

The rise includes increases on both the standing charge (up approximately 1% on average) and the unit rate (up by 9.6% for electricity and 13.8% for gas on average). 

The increase in bills will coincide with the withdrawal of winter fuel payments (worth between £100 and £300) for 10 million pensioners in England and Wales, a decision announced by Rachel Reeves at the end of July and matched by the Scottish government earlier this month.

Ms Reeves made the decision to try and fill what she called the “black hole” she has inherited in the country’s finances.  It has been reported that she may be looking to target increases in both inheritance and capital gains tax as methods of raising further revenue.

Inheritance tax is the tax paid on someone’s assets after they die, but only if they leave enough money to go above a certain threshold, with the main nil rate band standing at £325,000.  The standard rate of tax on everything above the threshold is 40% but there are exemptions for agricultural land, businesses, shares in companies listed on the AIM market (rather than on other stock exchanges) and pensions.

In the 2021-22 tax year, 27,800 deaths resulted in an inheritance tax (IHT) bill which was 4.39% of all UK deaths that year.  Across all of those estates the average tax bill was £215,000 but the bills on large estates pull up the figure. For the 2,120 estates valued at between £300,000 and £400,000 the IHT bill averaged £13,500 (about 4%) whereas for the 170 estates valued at more than £10m the average bill was £3.91m (about 20%).

Inheritance tax resulted in collections of £7.5bn for the 2023-24 financial year.  For 21,800 estates above the threshold, the transfer of someone’s unused allowance to their spouse or civil partner was used to cut the bill. £15.5bn worth of allowance was transferred in total. Had these assets been taxed, the Treasury may have received an extra £6.2bn.

Business property relief was used by 4,170 estates to shelter £2.9bn worth of assets from IHT in 2021-22, while agricultural property relief was used by 1,730 estates to shelter £1.6bn worth of assets. If these were removed an extra £1.8bn could be raised.

Turning to Capital Gains Tax (CGT), in the 2022-23 tax year 369,000 people paid CGT on £80.6bn worth of gains.

Currently, the rate of CGT paid depends on an individual’s annual income, with gains falling within the basic rate tax allowance (£12,571 to £50,270 a year) attracting a tax rate of 10%.  Gains falling within the higher or additional rate taxpayer are taxed at 20%.  Residential property sees a surcharge of 8% added to the tax rate.

As with inheritance tax, a small number of people making large gains pay the bulk of the tax. In 2022-23, those who made £5m or more represented less than 1% of those paying CGT but paid 41% of the tax collected.

It is widely predicted that one change would see the rates of CGT raised to be the same as income tax, which would go some way to offsetting the 15% reduction to collections of £14.4bn in 2022-23.  As with the run-up to every budget (with Ms Reeves’ first scheduled for 30 October), the insolvency profession will be pondering whether the conditions of Business Asset Disposal Relief will be subject to significant change.