As the UK’s capital gains tax rules continue to tighten — with the annual exempt amount now at just £3,000 per person and residential property rates at 18% and 24% — families need to understand how these changes interact with their wider inheritance tax planning. At MP Estate Planning, we specialise in helping ordinary families protect their homes and assets using legal arrangements that have existed in English law for over 800 years.
Capital gains tax (CGT) and inheritance tax (IHT) don’t operate in isolation — a decision that reduces one can increase the other. Getting this balance right is critical, and it requires specialist knowledge of both tax regimes. By taking a proactive, tax-efficient approach to estate planning, you can ensure your family keeps more of what you’ve worked hard to build.
Key Takeaways
- The CGT annual exempt amount has been cut drastically — from £12,300 to just £3,000 — meaning more disposals now trigger a tax bill.
- CGT and IHT interact in complex ways: reducing one liability can inadvertently increase the other without proper planning.
- Tax-efficient estate planning using lifetime trusts can help manage both CGT and IHT exposure when structured correctly.
- Transferring your main residence into certain trusts does not normally trigger CGT at the point of transfer, thanks to Private Residence Relief.
- Specialist legal advice is essential — general financial advisors often lack the trust law expertise needed for effective planning.
Understanding Capital Gains Tax in the UK
Capital gains tax is one of two main taxes that affect estate planning in England and Wales (the other being inheritance tax). Understanding how CGT works — and critically, how it interacts with trusts and IHT — is the foundation of effective planning.
What is Capital Gains Tax?
Capital gains tax is a tax charged by HMRC on the profit (or “gain”) you make when you dispose of an asset that has increased in value. “Disposal” doesn’t just mean selling — it includes giving an asset away, transferring it into a trust, or exchanging it. The tax applies to the gain, not the total value of the asset.
Key aspects to consider:
- CGT is levied on the gain only — the difference between what you paid for the asset (or its value when you acquired it) and what you receive or its market value when disposed of.
- Allowable costs — such as solicitors’ fees, stamp duty on purchase, and improvement costs — can be deducted from the gain.
- Your main residence is normally exempt under Private Residence Relief (PRR), which is why most homeowners never pay CGT on their home.
- The current annual exempt amount is just £3,000 per person (from 6 April 2024), down from £12,300 just two years earlier.
How is Capital Gains Tax Calculated?
The calculation involves subtracting the original purchase price (plus allowable costs) from the disposal value of the asset, then deducting your annual exempt amount. The resulting taxable gain is then charged at the applicable rate depending on whether the asset is residential property or another type of asset, and your income tax band.
| Component | Description | Example |
|---|---|---|
| Purchase Price | Original cost of acquiring the asset | £200,000 |
| Allowable Expenses | Costs associated with acquiring, improving and disposing of the asset | £10,000 |
| Sale Price | The amount received from selling the asset | £300,000 |
| Capital Gain | Sale Price – (Purchase Price + Allowable Expenses) | £90,000 |
In this example, a property bought for £200,000 with £10,000 in allowable costs, sold for £300,000, produces a gain of £90,000. After deducting the £3,000 annual exempt amount, £87,000 would be subject to CGT. For residential property, the rates are currently 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers. That could mean a tax bill of between £15,660 and £20,880 — a significant sum that proper planning could help reduce or defer.
For trusts, the CGT position is different again: trustees pay 24% on residential property gains and 20% on other assets, with an annual exempt amount of just £1,500 (half the individual allowance). This is why the interaction between personal and trust tax planning requires specialist advice.
Recent Changes to Capital Gains Tax Regulations
The last few years have seen rapid and significant changes to CGT that directly affect estate planning. Understanding the timeline and detail of these changes is essential for anyone holding property or investments.
Key Updates in the Legislation
The most impactful recent change has been the dramatic reduction in the annual exempt amount. In the 2022/23 tax year, individuals could realise gains of up to £12,300 without paying any CGT. This was cut to £6,000 for 2023/24, and then halved again to just £3,000 from April 2024. For trusts, the exempt amount fell to just £1,500.
Additionally, from the Autumn Budget 2024, CGT rates on non-property assets were increased. The lower rate rose from 10% to 18%, and the higher rate from 20% to 24%, aligning them with residential property rates. This means the previous advantage of holding non-property investments has been significantly reduced.
These changes have significant implications for estate planning strategies:
- More disposals now trigger a CGT liability, particularly for buy-to-let landlords and those with investment portfolios.
- The interaction with holdover relief and Private Residence Relief becomes more important than ever when transferring assets into trusts.
- Timing of asset disposals — whether during lifetime or on death — now requires more careful analysis.
- Planning that was appropriate two years ago may no longer be optimal under current rates and allowances.
Timeline for Implementing Changes
Understanding when each change took effect — and what may be coming next — is crucial for planning decisions.
| Year | Change | Impact |
|---|---|---|
| 2023/24 | Annual exempt amount reduced from £12,300 to £6,000 | Twice as many disposals became taxable |
| 2024/25 | Annual exempt amount reduced further to £3,000; non-property rates increased to 18%/24% | Most gains now trigger a tax bill; property and non-property rates aligned |
Looking ahead, the Government has signalled further changes to the tax landscape. From April 2026, Business Property Relief and Agricultural Property Relief will be capped at 100% for the first £1 million of combined business and agricultural property, with only 50% relief on the excess. And from April 2027, inherited pension funds will become liable for IHT for the first time. Each of these changes creates new planning challenges — and opportunities for those who act early.
The Impact of Capital Gains Tax on Estate Planning
CGT and IHT are two sides of the same coin in estate planning. A strategy that focuses on one without considering the other can produce unexpected and costly results. This is why at MP Estate Planning, we always assess both taxes together using our proprietary Estate Pro AI 13-point threat analysis.
Why Estate Planning is Important
Estate planning is about far more than writing a will. A will only takes effect after death, goes through probate (becoming a public document once the Grant is issued), and provides no protection against care fees, divorce, or family disputes during your lifetime. Proper estate planning — including the use of lifetime trusts — provides protection that a will simply cannot.
In the context of CGT and IHT, effective planning allows you to:
- Transfer your main residence into a trust without triggering CGT (Private Residence Relief applies at the point of transfer)
- Use holdover relief when transferring assets into certain trusts, deferring any CGT until the trustees eventually dispose of the asset
- Manage the interaction between CGT and IHT — on death, assets receive a CGT-free uplift to market value, but may be subject to 40% IHT. During lifetime, a transfer may trigger CGT but start the 7-year clock for IHT. Getting this balance right is essential
- Protect assets from care fees, with the average cost of residential care currently running at £1,100-£1,500 per week — and between 40,000 and 70,000 homes sold annually in the UK to fund care
How Changes Affect Property Valuations
Changes to CGT regulations directly affect the cost of disposing of property — whether by sale, gift, or transfer into a trust. With the annual exempt amount now at just £3,000, even modest gains on second properties or buy-to-lets can result in significant tax bills. For a buy-to-let property that has doubled in value over 20 years, the CGT on disposal could run to tens of thousands of pounds.
This is particularly important for families considering whether to transfer investment properties into trust arrangements. A Settlor Excluded Asset Protection Trust, for example, can remove a buy-to-let property from your estate for IHT purposes — but the transfer may trigger CGT unless holdover relief is available. The timing, structure, and type of trust used all affect the tax outcome. This is specialist territory, and getting it wrong can be very expensive.
Strategies for Mitigating Capital Gains Tax
There are several legitimate strategies available under UK law to reduce or defer CGT liabilities. The key is understanding which strategies apply to your specific situation and how they interact with your wider estate plan.
Efficient Investment Approaches
One of the most straightforward ways to shelter investment gains from CGT is through ISAs (Individual Savings Accounts). Any gains made within an ISA wrapper are completely exempt from CGT, regardless of amount. With the current ISA allowance at £20,000 per person per tax year, married couples can shelter £40,000 of new investment annually.
Beyond ISAs, there are several other tax-efficient approaches to consider:
- Bed and ISA: Selling investments, crystallising gains within your annual exempt amount, and repurchasing within an ISA wrapper to shelter future growth.
- Enterprise Investment Scheme (EIS) and Seed EIS: Investments that qualify for CGT deferral or exemption, though these carry higher investment risk and are not suitable for everyone.
- Spouse transfers: Transfers between spouses and civil partners are CGT-free, allowing couples to use both annual exempt amounts and potentially access lower tax rates.
Utilizing Allowances and Exemptions
Making full use of the reliefs available under UK tax law is essential, particularly now that the annual exempt amount has been so dramatically reduced. The most important reliefs for estate planning purposes are:
| Allowance/Exemption | Description | Benefit |
|---|---|---|
| Private Residence Relief (PRR) | Exempts gains on the sale or transfer of your main home | Usually means zero CGT when transferring your home into a Family Home Protection Trust |
| Holdover Relief | Available when assets are transferred into or out of certain trusts — the gain is deferred, not immediately taxed | Allows asset transfers into trust without an immediate CGT bill |
| Capital Losses | Losses on disposals can be offset against gains in the same or future tax years | Reduces overall taxable gains and therefore the CGT bill |
It’s also worth noting that capital losses can be carried forward indefinitely, so even losses from years ago can be set against current gains. Keeping good records of all disposals — including those that resulted in losses — is essential for tax-efficient planning.
The Role of Trusts in Estate Planning
A trust is a legal arrangement — invented in England over 800 years ago — where legal ownership of assets is held by trustees for the benefit of named beneficiaries. A trust is not a separate legal entity; it has no legal personality of its own. The trustees are the legal owners, and they manage the assets according to the terms of the trust deed. This distinction is fundamental to understanding how trusts interact with CGT and IHT.
Types of Trusts to Consider
In England and Wales, trusts are primarily classified by when they take effect — lifetime trusts (created during the settlor’s lifetime) and will trusts (created on death through a will). Within these, the main types are:
- Discretionary trusts: The most common type for family asset protection (around 98-99% of the trusts we create). Trustees have absolute discretion over how and when to distribute income and capital to beneficiaries. No beneficiary has a fixed right to anything — this is precisely what provides protection against care fees, divorce, and bankruptcy. These trusts can last up to 125 years and are subject to the relevant property regime for IHT purposes.
- Interest in possession trusts: A named beneficiary (the life tenant) has the right to income or use of trust property during their lifetime. On their death, capital passes to the remainderman. Commonly used in will trusts to prevent sideways disinheritance — for example, ensuring a surviving spouse can live in the family home, but the property ultimately passes to the children from a first marriage. Post-March 2006 interest in possession trusts are generally treated as relevant property for IHT, unless they qualify as an immediate post-death interest or a disabled person’s interest.
- Bare trusts: The beneficiary has an absolute right to both capital and income once they reach 18 (under the principle in Saunders v Vautier, the beneficiary can collapse the trust at majority). The trustee is merely a nominee. Bare trusts offer virtually no asset protection — the beneficiary can demand the assets at any time once they reach 18, and the assets are treated as belonging to the beneficiary for tax purposes. They are not IHT-efficient and cannot protect against care fees or divorce.
Benefits of Using Trusts
When properly structured, trusts offer significant benefits for managing CGT and IHT together:
- CGT on main residence transfers: Transferring your main home into a Family Home Protection Trust typically attracts zero CGT because Private Residence Relief applies at the point of transfer.
- Holdover relief: When assets are transferred into discretionary trusts, holdover relief is usually available, meaning no immediate CGT is payable — the gain is deferred until the trustees dispose of the asset.
- IHT planning: Assets held in an irrevocable discretionary trust are generally outside the settlor’s estate for IHT purposes. A transfer into a discretionary trust is a Chargeable Lifetime Transfer — if the value is within the available nil rate band (£325,000), there is no entry charge. If the settlor survives seven years, the value falls outside their cumulative total completely. It is worth noting that a revocable trust provides no IHT benefit — HMRC treats assets in a settlor-interested trust as still belonging to the settlor.
- Bypassing probate delays: Trust assets do not form part of the probate estate, so trustees can act immediately on the settlor’s death — no waiting for a Grant of Probate, which currently takes 3-12 months for the full process and longer where property sales are involved.
- Privacy: Unlike a will, which becomes a public document once a Grant of Probate is issued, a trust deed remains private. The Trust Registration Service is not publicly accessible (unlike Companies House).
- Care fee protection: In a discretionary trust, no beneficiary owns the assets — the trustees hold them with absolute discretion. If a beneficiary later needs care, the local authority cannot automatically access trust assets because the beneficiary has no entitlement to them. However, this planning must be done years in advance — you cannot transfer assets after a foreseeable need for care arises without risking a deprivation of assets challenge.
It is important to understand that trusts are tax-efficient planning tools, not tax avoidance schemes. They must be set up for legitimate reasons and properly administered, including registration on the Trust Registration Service within 90 days of creation and filing annual trust tax returns (SA900) where required.
Planning for Capital Gains Tax in Inheritance
One of the most misunderstood areas of estate planning is how CGT and IHT interact when assets pass on death versus during lifetime. Getting this wrong can cost families tens of thousands of pounds.
Understanding Inheritance Tax Implications
When someone dies, their assets receive a CGT-free uplift to market value at the date of death. This means the beneficiaries inherit at the current value with no CGT to pay on the historical gain. However, the estate may face IHT at 40% on the total value above the nil rate band (currently £325,000 per person, frozen since 2009 and confirmed frozen until at least April 2031). Any unused nil rate band transfers to a surviving spouse or civil partner, giving a married couple a combined maximum of £650,000.
The Residence Nil Rate Band adds up to £175,000 per person — but only if a qualifying residential interest passes to direct descendants (children, grandchildren, or step-children). It is not available if you leave your home to siblings, nieces, nephews, or friends. It also tapers away by £1 for every £2 that the estate value exceeds £2,000,000. Combined and fully transferable between spouses, a married couple can potentially pass up to £1,000,000 free of IHT (£650,000 NRB + £350,000 RNRB), provided all the conditions are met.
This creates a genuine planning dilemma: hold assets until death to benefit from the CGT-free uplift (but potentially pay 40% IHT), or transfer assets during lifetime to start managing IHT exposure (but potentially trigger CGT). The answer depends entirely on the specific circumstances — the type of asset, its value, how it’s used, and the family structure.
Strategies for Reducing Tax Liabilities
Several strategies can help manage the CGT/IHT interaction in inheritance planning:
- Family Home Protection Trust: Transferring your main residence into this type of trust typically triggers zero CGT (PRR applies) and, when properly structured, retains access to the Residence Nil Rate Band. This is Mike Pugh’s most popular trust product for homeowners.
- Gifted Property Trust: Designed to remove 50% or more of the home’s value from your estate while avoiding the Gift with Reservation of Benefit rules, and starting the 7-year clock for IHT purposes.
- Holdover relief on trust transfers: When transferring non-residential assets into discretionary trusts, holdover relief can defer the CGT — meaning no immediate tax bill on the transfer, with the gain carried over to the trustees’ base cost.
- Life Insurance Trust: Placing life insurance policies into trust ensures the payout goes directly to beneficiaries without forming part of the estate — bypassing both probate delays and the 40% IHT charge. These trusts are typically free to set up.
- Utilising annual exemptions: Making regular gifts using the £3,000 annual gift exemption (with one year of carry-forward if unused), small gifts of £250 per recipient, wedding gifts (£5,000 from a parent, £2,500 from a grandparent, £1,000 from anyone else), and normal expenditure out of surplus income can gradually reduce the estate over time.
The key principle is this: plan, don’t panic. The earlier you start, the more options are available to you. Transferring assets years before any foreseeable need for care or estate settlement gives you the strongest possible position.
The Importance of Professional Guidance
The interaction between CGT, IHT, trust taxation, and property law is genuinely complex. As Mike Pugh often says: “The law — like medicine — is broad. You wouldn’t want your GP doing surgery.” Estate planning involving trusts and tax requires a specialist, not a generalist.
When to Consult with Specialists
There are several key moments when specialist advice is particularly valuable:
- When you’re considering transferring property into a trust — the CGT, IHT, and stamp duty implications all need to be assessed together.
- When tax rates or allowances change (as they have significantly in 2023 and 2024) — your existing plan may need updating.
- When your family circumstances change — marriage, divorce (currently around 42% in the UK), the birth of grandchildren, or bereavement.
- When you or your spouse are approaching an age where care may become a consideration — you must plan years in advance, as transferring assets after a foreseeable need arises can be challenged by the local authority as deprivation of assets. Unlike the 7-year IHT rule, there is no fixed time limit for deprivation — but the longer the gap between the transfer and the need for care, the harder it is for the local authority to prove avoidance was a significant operative purpose.
- When you own multiple properties, particularly buy-to-lets or investment properties — the CGT and IHT treatment differs significantly from your main residence.
Choosing the Right Legal Support
Not all solicitors or financial advisors have expertise in trust law and tax planning. When choosing legal support, look for:
| Aspect | Considerations | Benefits |
|---|---|---|
| Trust Law Specialism | Demonstrated expertise in drafting and administering lifetime trusts; understanding of the relevant property regime, CGT holdover relief, and PRR | Trust arrangements that actually achieve your objectives, rather than generic wills dressed up as planning |
| Transparent Pricing | Published prices with no hidden fees — MP Estate Planning is the first and only company in the UK that actively publishes all prices on YouTube | No surprises; trust setup from £850 for straightforward cases — roughly the cost of one to two weeks of care fees |
| Holistic Analysis | Assessment of CGT, IHT, care fees, probate, divorce risk, and family dynamics together — not just one issue in isolation | A comprehensive plan that addresses all threats, using tools like our Estate Pro AI 13-point threat analysis |
Trusts are not just for the rich — they’re for the smart. With the average home in England now worth around £290,000, many ordinary families find themselves above the nil rate band without realising it. The nil rate band has been frozen at £325,000 since 2009 — over 16 years without any increase — while house prices have roughly doubled. When you compare the cost of a trust to the potential costs of care fees (£1,100-£1,500 per week), a 40% IHT bill, or assets lost in a divorce, it’s one of the most cost-effective forms of protection available.
Reviewing Your Estate Plan Regularly
An estate plan is not a “set and forget” document. The dramatic changes to CGT allowances over the past two years alone demonstrate why regular reviews are essential. A plan that was perfectly optimised in 2022 may now have significant gaps.
Frequency of Reviews
We recommend reviewing your estate plan every 2-3 years as a minimum, and immediately whenever any of the following occur:
Life events that should trigger a review include marriage, divorce, the birth of children or grandchildren, bereavement, significant changes in property values, receiving an inheritance, or retirement. Legislative changes — such as the CGT annual exempt amount reductions, the announced changes to Business Property Relief from April 2026, and the inclusion of pensions in IHT from April 2027 — should also prompt an immediate review.
Signs It’s Time to Update
Specific warning signs that your estate plan needs updating include:
- Your plan was created before the CGT annual exempt amount was reduced — you may now face CGT liabilities that weren’t anticipated.
- You’ve acquired additional property (a buy-to-let, holiday home, or inherited property) that isn’t covered by your existing trust arrangements.
- Your children have married or divorced — if assets are in a bare trust or pass outright through a will, they could be exposed to a divorcing spouse’s claim. A discretionary trust, by contrast, protects assets because no beneficiary has a fixed entitlement.
- Your named trustees are no longer appropriate — through death, incapacity, falling out, or simply aging. Your trust deed should include a clear process for removing and replacing trustees.
- You haven’t reviewed the interaction between your trust, your will, your Lasting Powers of Attorney, and any pension death benefit nominations — these documents need to work together as a coordinated plan.
Not losing the family money provides the greatest peace of mind above all else. Regular reviews are how you maintain that protection over time.
Preparing for Future Changes in Tax Laws
The UK tax landscape is shifting rapidly. The nil rate band has been frozen at £325,000 since 2009 — over 16 years without any increase — while house prices have roughly doubled. This fiscal drag means that more ordinary families are pulled into IHT every year. Meanwhile, CGT allowances have been slashed. Planning ahead is not optional; it’s essential.
Staying Informed on Legislative Developments
Key upcoming changes that families should be preparing for now:
- April 2026: Business Property Relief and Agricultural Property Relief will be capped at 100% for the first £1 million, then 50% on the excess. Family businesses and farms that were previously fully exempt from IHT could face significant tax bills.
- April 2027: Inherited pension pots will be brought into the IHT net for the first time. This is a fundamental change — previously, pensions were one of the most tax-efficient ways to pass wealth to the next generation.
- Ongoing: The nil rate band and Residence Nil Rate Band remain frozen until at least April 2031, meaning inflation continues to erode their real value year after year.
How to Adjust Your Planning Strategy
Proactive planning in response to these changes involves several practical steps:
| Strategy | Description | Potential Benefit |
|---|---|---|
| Review Trust Structures | Assess whether your existing trusts are optimally structured for current and forthcoming CGT and IHT rules | Ensure continued tax efficiency and full use of available reliefs |
| Consider Pension Nominations | Review pension death benefit nominations in light of the 2027 changes — consider whether a Life Insurance Trust or other arrangements would be more efficient | Avoid up to 40% IHT on pension pots that pass on death |
| Maximise Annual Exemptions | Use the £3,000 annual gift exemption (with one year carry-forward), small gifts of £250 per recipient, wedding gifts, and normal expenditure out of income systematically each year | Gradually reduce the taxable estate while maintaining your standard of living |
Keeping families wealthy strengthens the country as a whole. By staying informed and working with specialists who understand the full picture — CGT, IHT, trust law, care fees, and probate — you can ensure your family’s assets are protected not just for the next Budget, but for generations to come.
Conclusion: Effective Estate Planning for the Future
The changes to capital gains tax over the past two years — combined with the frozen IHT thresholds, upcoming pension changes, and the ever-present risk of care fees — mean that estate planning has never been more important for ordinary families. England invented trust law 800 years ago, and these legal arrangements remain the most effective way to protect family wealth today.
Ongoing Education and Adaptation
The tax landscape will continue to evolve. Staying informed about inheritance tax planning developments and working with specialists who focus exclusively on trust-based estate planning — not generalists who dabble — will ensure your plan remains effective as the rules change.
Informed Decision-Making
By understanding how CGT and IHT interact, how trusts can manage both tax exposures simultaneously, and how to time asset transfers for maximum efficiency, you can create a plan that genuinely protects your family. Whether it’s a Family Home Protection Trust for your main residence, a Settlor Excluded Asset Protection Trust for investment properties, or a Life Insurance Trust to protect your policy proceeds, the right trust arrangement — implemented at the right time — can save your family hundreds of thousands of pounds. Plan, don’t panic.