Quick answer
Capital Gains Tax (CGT) and Inheritance Tax (IHT) are distinct taxes that typically affect your estate differently in England and Wales. CGT applies when you sell assets during your lifetime, with most individuals benefiting from an annual exemption of £3,000 in 2024/25, while IHT generally applies to estates exceeding £325,000 (gov.uk — Inheritance Tax) (the Nil Rate Band) upon death, charged at 40% on the excess. Recent changes mean the frozen Nil Rate Band may significantly impact your planning, particularly from April 2027 onwards. Understanding these separate tax regimes may help you structure your assets more effectively and potentially reduce the overall tax burden on your family’s inheritance. This guide explains the key differences between Capital Gains Tax and Inheritance Tax in 2026/27, how each tax applies to different asset types, and practical strategies to protect your family’s wealth.
Last reviewed: 24 May 2026 by the MP Estate Planning editorial team. Jurisdiction: England and Wales. Scotland and Northern Ireland have different probate and intestacy rules; the IHT thresholds are UK-wide.
As a homeowner in the UK, understanding the tax implications on your assets is crucial for protecting your family’s wealth. Recent changes in tax legislation have made it even more important to stay informed about how Inheritance Tax (IHT) and Capital Gains Tax (CGT) work.
We are here to guide you through the complexities of these taxes and provide you with the knowledge to make informed decisions. By understanding the differences between capital gains vs inheritance tax, you can ensure that your family’s assets are protected for future generations.
Key Takeaways
- Understanding the differences between Capital Gains Tax and Inheritance Tax is vital for protecting your family’s assets.
- Recent changes in tax legislation have significant implications for UK homeowners.
- Informed decisions can help ensure that your family’s wealth is preserved for future generations.
- Expert guidance is available to navigate the complexities of these taxes.
- Staying informed is crucial in today’s changing tax landscape.
What is Capital Gains Tax?
Three rule changes you may need to consider (2026/27)
1. Pensions become subject to IHT from 6 April 2027. Most unused defined-contribution pension pots currently sit outside the estate for IHT — that ends on 6 April 2027 (gov.uk policy paper). HMRC estimates around 10,500 estates will face IHT for the first time as a result.
2. Business and agricultural property reliefs capped at £2.5m per person from 6 April 2026. Above the cap, only 50% relief applies — effective IHT of 20%. AIM shares dropped to 50% relief and do not use the £2.5m allowance (Saffery — APR/BPR reforms).
3. The NRB, RNRB and £2m taper threshold are frozen until 5 April 2031 following the 2024 and 2025 Budgets (gov.uk — NRB and RNRB freeze). With inflation, more estates will be pulled into IHT each year — a process commonly called “fiscal drag.”
Capital Gains Tax is levied on the gain made from the sale of an asset that has appreciated in value. It’s a crucial consideration for individuals looking to manage their investments and protect their family’s assets.
Definition and Purpose
Capital Gains Tax is a tax on the profit made when you sell an asset that has increased in value. Its primary purpose is to ensure that individuals contribute to the public purse when they realise gains from their investments.
For instance, if you purchased shares for £10,000 and sold them for £15,000, you’d be liable for Capital Gains Tax on the £5,000 gain. Understanding this tax is essential for effective financial planning.
Key Terms Explained
To grasp how Capital Gains Tax works, it’s essential to understand some key terms:
- Gain: The profit made from selling an asset.
- Allowance: The amount of gain that is outside the scope of IHT.
- Rate: The percentage of tax applied to the gain.
For more detailed information on how these terms apply to inherited assets, you can visit our page on Inheritance Tax and Capital Gains Tax on Inherited.
How It’s Calculated
The calculation of Capital Gains Tax involves several steps:
- Determine the gain made on the sale of the asset.
- Subtract any allowable deductions, such as costs associated with the sale.
- Apply any relevant reliefs, like Entrepreneurs’ Relief, if applicable.
- Calculate the tax due based on the applicable rate, considering your overall income and the type of asset sold.
For example, if you’re a higher-rate taxpayer, you might pay 20% Capital Gains Tax on your investment gains. Accurate calculation is crucial to avoid underpayment or overpayment.
What is Inheritance Tax?
In the UK, Inheritance Tax is levied on the estate of someone who has passed away, with certain exemptions and reliefs available to reduce the tax burden. Understanding these can help in planning and potentially minimising the tax liability on your estate.
Definition and Purpose
Inheritance Tax is a tax on the transfer of a deceased person’s estate to their beneficiaries. The purpose of this tax is to generate revenue for the government while also addressing wealth inequality. The tax applies to the total value of the estate, including property, money, and possessions.
Key Exemptions
There are several exemptions and reliefs available that can reduce the Inheritance Tax liability:
- Nil-Rate Band: The first £325,000 of the estate is exempt from Inheritance Tax.
- Residence Nil-Rate Band: An additional exemption of up to £175,000 (gov.uk — RNRB) if the deceased’s main residence is passed to direct descendants.
- Charitable Donations: Gifts to registered charities are exempt from Inheritance Tax.
How It’s Calculated
The calculation of Inheritance Tax involves determining the total value of the estate and then applying the available exemptions and reliefs. The taxable value is then subject to Inheritance Tax at the prevailing rate, typically 40%.
| Estate Component | Value | Exemption/Relief | Taxable Amount |
|---|---|---|---|
| Property | £500,000 | Residence Nil-Rate Band: £175,000 | £325,000 |
| Cash & Investments | £200,000 | Nil-Rate Band: £200,000 | £0 |
| Total | £700,000 | £325,000 |
Effective inheritance tax planning can significantly reduce the tax burden on your estate, ensuring more of your wealth is passed to your loved ones. Understanding the intricacies of Inheritance Tax is a crucial step in protecting your family’s assets.
“Inheritance Tax can be a complex and daunting topic, but with the right guidance and planning, families can navigate these challenges effectively.”
The Importance of Asset Protection
Understanding the tax implications of asset transfer is vital for safeguarding your family’s wealth. As you consider the future of your family’s assets, it’s essential to grasp the importance of asset protection.
Why Understanding Taxes Matters
Taxes can significantly impact the value of the assets you pass on to your loved ones. Capital Gains Tax and Inheritance Tax are two critical areas to understand. By comprehending these taxes, you can make informed decisions to minimize tax liabilities.
For instance, when transferring assets, it’s crucial to consider the tax implications. Let’s examine a scenario:
| Asset Type | Capital Gains Tax Implication | Inheritance Tax Implication |
|---|---|---|
| Property | Potential CGT liability on gain | Part of estate for IHT purposes |
| Investments | CGT applicable on disposal | Included in estate for IHT |
Strategies for Protecting Wealth
Effective strategies can help minimize tax liabilities. Some approaches include:
- Utilizing trusts to manage and distribute assets
- Gifting assets to beneficiaries during your lifetime
- Leveraging allowances and reliefs available for tax purposes
By adopting these strategies, you can protect your family’s wealth and ensure a smoother transfer of assets to future generations.
Capital Gains Tax: Key Features
Navigating the complexities of Capital Gains Tax requires a clear understanding of its key features. We will explore the essential aspects, including who is liable, the applicable rates and allowances, and the reporting requirements.
Who Pays Capital Gains Tax?
Capital Gains Tax is payable on the disposal of assets that have increased in value. This includes investment gains from the sale of shares, bonds, and property. Individuals, trusts, and companies may be liable, depending on their tax status and the nature of the assets disposed of.
For instance, if you sell a second home or investments, you may be subject to Capital Gains Tax on the profit made. To understand more about how Capital Gains Tax works, you can visit our detailed guide on what is Capital Gains Tax in the.
Rates and Allowances
The rates of Capital Gains Tax vary depending on your income tax band and the type of asset. For the 2023-24 tax year, the rates are 10% and 20% for basic and higher-rate taxpayers, respectively, on gains from residential property, and 10% and 28% for trustees. For other assets, the rates are 18% and 24%.
| Taxpayer Status | CGT Rate on Residential Property | CGT Rate on Other Assets |
|---|---|---|
| Basic Rate Taxpayer | 10% | 18% |
| Higher Rate Taxpayer | 20% | 24% |
There is also an annual outside the scope of IHT allowance, which for the 2023-24 tax year is £6,000 for individuals and £3,000 for trusts.
Reporting Requirements
Capital Gains Tax must be reported to HMRC, typically through a Self Assessment tax return. For residential property gains, a separate Capital Gains Tax return is required, and payment is due within 60 days of the sale. Accurate record-keeping is essential to ensure compliance and to minimize tax liability.
Understanding these key features can help you navigate the complexities of Capital Gains Tax and make informed decisions about your assets and investments.
Inheritance Tax: Key Features
Effective Inheritance Tax planning can help protect your family’s financial future. Understanding the intricacies of Inheritance Tax is vital for ensuring that your estate is distributed according to your wishes, with minimal tax liability.
Who is Liable for Inheritance Tax?
Inheritance Tax is typically paid by the estate’s personal representatives, usually the executors named in the will or administrators if there’s no will. The tax is calculated on the estate’s value, including property, money, and other assets, at the time of death. It’s essential to understand that Inheritance Tax can be a complex area, and seeking professional advice is often beneficial.
Rates and Thresholds
The rate of Inheritance Tax in the UK is 40% on the value of the estate above the nil-rate band, which is currently £325,000. However, if you leave your main residence to direct descendants, an additional residence nil-rate band of up to £175,000 may be applicable, making the total outside the scope of IHT allowance £500,000. For married couples or civil partners, any unused nil-rate band can be transferred to the surviving partner, potentially allowing a total outside the scope of IHT allowance of £1 million.
Reliefs and Exemptions
There are several reliefs and exemptions that can reduce the Inheritance Tax liability. For instance, gifts to charities are exempt from Inheritance Tax, and there are reliefs for inheritance tax planning related to business property and agricultural property. Understanding these reliefs can significantly impact the amount of tax payable.
To minimise Inheritance Tax, it’s crucial to plan ahead. This might involve making strategic gifts during your lifetime, setting up trusts, or taking advantage of other estate planning strategies. We recommend consulting with estate planning professionals to tailor a plan that suits your specific circumstances and goals.
Comparing Capital Gains and Inheritance Tax
As you plan for the future, it’s essential to grasp the differences between capital gains tax and inheritance tax. Both taxes play significant roles in the realm of financial planning, yet they apply in distinct contexts and have different implications for families.
Differences in Application
Capital gains tax is levied on the profit made from the sale of assets, such as property or investments. In contrast, inheritance tax is charged on the estate of a deceased person before it is passed on to beneficiaries. Understanding these fundamental differences is crucial for effective tax planning.
- Capital Gains Tax applies to the gain on the sale of assets.
- Inheritance Tax is levied on the estate of the deceased.
Key Distinctions: While capital gains tax is concerned with the disposal of assets during one’s lifetime, inheritance tax focuses on the transfer of wealth upon death.
Situational Examples
To illustrate the differences, consider the following scenarios:
- Selling a second home: If you sell a second home for a profit, you may be liable for capital gains tax on that profit.
- Inheriting property: If you inherit property, the estate may be subject to inheritance tax, depending on its value and the tax thresholds applicable at the time.
The Impact on Families
The implications of these taxes on families can be significant. For instance, capital gains tax can reduce the amount available for reinvestment or distribution among family members, while inheritance tax can affect the overall value of the estate passed on to the next generation.
Effective planning: By understanding the differences and implications of these taxes, families can make informed decisions to minimize tax liabilities and protect their wealth.
Tax Planning Strategies
Effective tax planning is crucial for protecting family wealth. We understand that minimising tax liabilities is a top priority for families. By understanding and implementing the right tax planning strategies, you can significantly reduce your tax burden and safeguard your family’s financial security.
Minimising Capital Gains Tax
To minimise Capital Gains Tax, consider theising your allowances and reliefs available. For instance, transferring assets to your spouse or civil partner can be an effective strategy since transfers between spouses are generally exempt from Capital Gains Tax.
- Utilise your annual Capital Gains Tax allowance.
- Transfer assets to your spouse or civil partner.
- Consider gifting assets to children or grandchildren.
Planning for Inheritance Tax
Inheritance Tax planning involves making gifts and using trusts to reduce the value of your estate. Gifts made more than seven years before your passing are generally exempt from Inheritance Tax.
- Make gifts to reduce the value of your estate.
- Use trusts to manage and distribute your assets.
- Consider business property relief and agricultural property relief.
Combining Strategies for Family Wealth
Combining tax planning strategies can provide comprehensive protection for your family’s wealth. By integrating Capital Gains Tax and Inheritance Tax planning, you can create a robust estate plan that minimises tax liabilities and ensures your family’s financial security.
Key considerations:
- Review and adjust your estate plan regularly.
- Seek professional advice to ensure you’re taking advantage of all available reliefs and allowances.
- Consider the impact of tax legislation changes on your estate plan.
Recent Changes in Tax Legislation
Changes in tax legislation have impacted the way Capital Gains Tax and Inheritance Tax are applied in the UK. As experienced professionals, we are here to guide you through these changes and their implications for taxpayers.
Updates to Capital Gains Tax
The UK government has made significant updates to the Capital Gains Tax rates. As of the latest budget, the rates have been adjusted to reflect the current economic conditions. For instance, the basic rate of Capital Gains Tax is now 10% for basic-rate taxpayers, while the higher rate is 20% for higher-rate taxpayers. However, for residential property and carried interest, the rates are 18% and 28% respectively.
These changes mean that taxpayers need to be more mindful of their capital gains, especially if they are disposing of assets that have appreciated significantly. It’s essential to understand how these changes affect your overall tax liability.
Changes to Inheritance Tax
Inheritance Tax planning has become more complex due to recent legislative changes. The nil-rate band has remained at £325,000 since 2009, and the residence nil-rate band, introduced in 2017, is now £175,000 per person. However, there are discussions about potential reforms that could affect the thresholds and rates in the future.
It’s crucial for individuals to review their estate plans in light of these changes. Effective Inheritance Tax planning can help minimize the tax burden on your beneficiaries, ensuring they receive more of your estate.
Implications for Taxpayers
The implications of these changes are significant for taxpayers. With the adjustments to Capital Gains Tax rates, individuals may need to reconsider their investment strategies to minimize their tax liabilities. For Inheritance Tax, the key is to plan ahead, utilizing available reliefs and exemptions to reduce the taxable value of your estate.
We recommend reviewing your financial plans regularly to adapt to these changes. By doing so, you can ensure that you are making informed decisions that protect your family’s assets.
The Role of Estate Planning
Effective estate planning is essential for protecting your assets and minimizing tax liabilities. Estate planning involves making a comprehensive plan for how your assets will be distributed after your passing, ensuring that your loved ones are taken care of and that your wishes are respected.
Wills and Trusts: The Building Blocks
Wills and trusts are fundamental components of estate planning. A will outlines how you want your assets to be distributed, while a trust can provide a more flexible and tax-efficient way to manage your estate. By establishing a trust, you can ensure that your assets are transferred to your beneficiaries without being subject to certain taxes.
Key Benefits of Trusts:
- Tax efficiency: Trusts can help minimize inheritance tax liabilities.
- Flexibility: Trusts allow for more control over how and when assets are distributed.
- Privacy: Unlike wills, trusts are not publicly recorded, maintaining your family’s privacy.
Using Trusts to Manage Taxes
Trusts can be an effective tool in managing inheritance tax. By transferring assets into a trust, you can reduce the value of your estate, thereby minimizing the amount of inheritance tax payable. There are various types of trusts, each with its own benefits and considerations.
| Type of Trust | Tax Benefits | Key Features |
|---|---|---|
| Bare Trust | Inheritance tax benefits | Assets are held in the name of the trustees for the beneficiary. |
| Interest in Possession Trust | Potential for reduced inheritance tax | A beneficiary has the right to income from the trust assets. |
| Discretionary Trust | Flexibility in distributing assets, potential tax benefits | Trustees have discretion over the distribution of income and capital. |
Seeking Professional Advice
Estate planning can be complex, and it’s often beneficial to seek professional advice to ensure that your plan is effective and tailored to your specific needs. A professional can help you navigate the intricacies of wills, trusts, and tax planning, providing peace of mind that your estate is managed according to your wishes.
By understanding the role of estate planning and utilizing tools like wills and trusts, you can protect your family’s assets and ensure a smoother transfer of wealth. We recommend consulting with a professional to create a personalized estate plan that meets your family’s unique needs.
Impact on Investments
Capital Gains Tax and Inheritance Tax play a pivotal role in shaping investment decisions for individuals and families. Understanding these taxes is essential for investors to make informed choices that align with their financial goals and family needs.
How Capital Gains Affect Investment Decisions
When investors decide to sell their assets, they need to consider the Capital Gains Tax implications. The tax rate on gains from the sale of investments can significantly impact the overall return on investment. For instance, a higher capital gains tax rate might discourage investors from selling their assets, leading to a “lock-in” effect where they hold onto investments longer than they might have otherwise.
To illustrate, let’s consider an example:
| Investment Type | Capital Gains Tax Rate | Impact on Investment Decision |
|---|---|---|
| Stocks | 18% | Potential for long-term holding due to lower tax rate |
| Property | 28% | Higher tax rate may influence decision to hold or sell |
Inheritance Tax Considerations for Investors
Inheritance Tax is another critical factor for investors to consider, especially when planning for the future. Investors need to be aware of the potential Inheritance Tax liabilities that their beneficiaries might face. This awareness can influence investment choices, such as opting for investments that are more tax-efficient upon inheritance.
For example, certain investments are more conducive to passing on to beneficiaries without incurring significant Inheritance Tax. Understanding these nuances can help investors make more informed decisions that balance their current financial goals with their desire to leave a legacy for their families.
By carefully considering the implications of both Capital Gains Tax and Inheritance Tax, investors can develop strategies that minimize tax liabilities and maximize their returns. This proactive approach to tax planning is essential for protecting family assets and achieving long-term financial security.
Conclusion: Making Informed Choices
Understanding the implications of capital gains vs inheritance tax is crucial for protecting your family’s assets. As we’ve discussed, both taxes have distinct applications and can significantly impact your wealth.
Understanding Tax Implications
Capital Gains Tax and Inheritance Tax are complex, but with the right guidance, you can make informed decisions. By grasping the tax implications, you can develop strategies to minimize your tax liability.
Proactive Planning for Family Wealth
Proactive planning is key to safeguarding your family’s financial future. By considering the effects of capital gains vs inheritance tax, you can create a tailored plan that meets your needs and ensures the well-being of your loved ones.
We recommend seeking professional advice to navigate the complexities of tax legislation and optimize your estate planning. By doing so, you can enjoy peace of mind knowing that your family’s assets are protected.
FAQ
What is the difference between Capital Gains Tax and Inheritance Tax?
Capital Gains Tax is paid on the profit made from selling assets, such as property or investments, whereas Inheritance Tax is paid on the value of assets transferred to beneficiaries after someone’s passing.
How is Capital Gains Tax calculated?
Capital Gains Tax is calculated by subtracting the original purchase price of the asset, plus any allowable expenses, from the sale price to determine the gain. The taxable gain is then calculated by applying any available allowances and reliefs.
What is the nil-rate band for Inheritance Tax?
The nil-rate band is the threshold below which Inheritance Tax is not payable. For the 2022-2023 tax year, the nil-rate band is £325,000. Any value above this threshold is taxed at 40% or 36% if 10% or more of the net estate is left to charity.
How can I minimise Capital Gains Tax liability?
To minimise Capital Gains Tax, consider using the annual exempt amount, offsetting gains against losses, and using tax-efficient investment vehicles such as ISAs or pensions. You can also consider gifting assets to family members or using trusts to reduce tax liability.
What are the key exemptions and reliefs for Inheritance Tax?
Key exemptions and reliefs for Inheritance Tax include the nil-rate band, residence nil-rate band, and exemptions for gifts to charities, spouses, and civil partners. Business and agricultural property reliefs may also be available.
How do trusts work for tax planning?
Trusts can be used to manage taxes by transferring assets to beneficiaries while minimising tax liability. Trusts can be used to hold assets for future generations, reducing Inheritance Tax liability, or to provide for beneficiaries while minimising Capital Gains Tax.
What are the implications of recent changes to Capital Gains Tax and Inheritance Tax?
Recent changes to tax legislation may impact taxpayers, and it’s essential to stay informed to adapt to these changes. We recommend seeking professional advice to understand the implications of these changes on your specific circumstances.
How can I ensure my family’s assets are protected from tax?
To protect your family’s assets, consider engaging in proactive tax planning, using strategies such as gifting, trusts, and tax-efficient investments. Regularly reviewing and updating your estate plan can also help ensure your assets are protected.
When should I seek professional advice for tax planning?
We recommend seeking professional advice when your financial situation is complex, or you’re unsure about the tax implications of your decisions. Regular reviews with a tax professional can help ensure you’re taking advantage of available tax reliefs and exemptions.
Preparing for potential inheritance tax changes in 2025?
Schedule a free consultation with our team to explore setting up a trust.
How Inherited Property Is Taxed When Sold — And When Both Taxes Apply
One of the most common points of confusion we encounter in estate planning conversations is what happens when a beneficiary inherits a property and then decides to sell it. The interaction between Inheritance Tax and Capital Gains Tax at this point is frequently misunderstood, and the cost of that misunderstanding can be significant.
The CGT Starting Point After Inheritance
When you inherit a property, your Capital Gains Tax position is generally calculated from the market value of the asset at the date of death — not from what the deceased originally paid for it. This is sometimes referred to informally as a “probate value uplift” or “base cost reset.” In practice, it typically means that any gain accrued during the deceased’s lifetime falls outside the scope of CGT for the beneficiary. HMRC confirms this treatment under the general rules for assets acquired as legatees, as set out in HMRC Capital Gains Manual CG30700.
So, if a property was worth £400,000 at the date of death and you later sell it for £450,000, your chargeable gain would generally be calculated on the £50,000 increase from probate value — not on any growth that occurred before the estate was administered. This can materially reduce a beneficiary’s CGT exposure, though the outcome will depend on the specific facts and timing of any sale.
Can IHT and CGT Apply to the Same Asset?
Yes — and this is a scenario that catches many families off guard. It is entirely possible for a single asset to attract both Inheritance Tax on the estate and Capital Gains Tax on a subsequent sale by the beneficiary. These are separate taxes with separate charging events, and one does not offset the other.
Consider a realistic example: a London flat valued at £650,000 at probate, forming part of an estate that exceeds the available nil-rate bands. IHT at 40% may apply to the value above the combined £325,000 standard nil-rate band and, where applicable, the £175,000 residence nil-rate band (figures for 2024/25). If the beneficiary then sells the property within twelve months of probate and the market has moved, any increase above the probate value may be subject to CGT at 24% for higher-rate taxpayers on residential property (following the October 2024 Budget). The annual CGT exempt amount — now just £3,000 in 2024/25, sharply reduced from £12,300 in 2022/23 — offers only modest relief in scenarios involving significant property values.
What This Means for Estate Planning
The dual-tax exposure described above underlines why the timing and structure of asset transfers matters considerably. In our experience, families who consider trust arrangements or lifetime gifting strategies well in advance of death are often better placed to manage the combined tax burden. That said, the right approach will depend on individual circumstances, and we would always encourage families to seek guidance from a regulated tax adviser or solicitor before making structural decisions. Our team can help you understand the planning landscape and identify where professional input is most needed.
Common Questions About Inheritance Tax and Capital Gains Tax
Do I pay inheritance tax and capital gains tax?
You may face both taxes, but they apply at different stages and to different people. Inheritance Tax is typically charged on the deceased’s estate before assets are distributed to beneficiaries. Capital Gains Tax may then apply if a beneficiary sells an inherited asset that has increased in value since the date of death. These are legally distinct charges and, in the right circumstances, both can apply to the same asset — though whether both actually arise will depend on the size of the estate, the available reliefs, and what the beneficiary chooses to do with the asset.
Does inheritance trigger capital gains tax?
Inheriting an asset does not in itself trigger a CGT liability. The chargeable event for CGT purposes generally occurs when the beneficiary disposes of the asset — for example, by selling it. At that point, the gain is typically measured from the probate value at the date of death, not from the original acquisition cost. This means the beneficiary is generally not taxed on growth that occurred during the deceased’s lifetime, though the position can be more complex where assets are held in certain trust structures.
How much capital gains tax will I pay on inherited property?
This depends on the gain above probate value, your personal tax position, and the type of asset. For residential property, the higher rate of CGT is 24% following the October 2024 Budget, with the basic rate at 18%. The annual exempt amount is £3,000 in 2024/25 — a substantial reduction from the £6,000 allowance that applied in 2023/24 and the £12,300 available as recently as 2022/23. In practical terms, most beneficiaries selling inherited property of meaningful value will find that this allowance provides only limited shelter. HMRC’s guidance on reporting and paying CGT on UK property can be found at gov.uk — Report and pay Capital Gains Tax.
Which is cheaper, inheritance tax or capital gains tax?
In most cases, and measured by rate alone, CGT is the lower charge. IHT is levied at a flat 40% on the taxable estate above the available nil-rate bands. By contrast, the higher CGT rate on residential property is currently 24%. On a chargeable gain of £100,000, that difference amounts to £16,000 — a material sum. However, the comparison is not always straightforward in practice. IHT applies to total asset value above the threshold, whereas CGT applies only to the increase in value from probate. In many estates, the IHT charge is the more significant liability simply because it applies to a larger base.
How do you avoid capital gains tax on inheritance?
“Avoid” is perhaps too strong a term, but there are legitimate strategies that may reduce or defer a CGT liability on inherited assets. Selling the property while it still qualifies as your main residence — where that genuinely applies — may bring it within Private Residence Relief. Transferring assets between spouses or civil partners before sale can make use of both partners’ annual exempt amounts. Holding assets for longer periods may allow planning opportunities to arise. It is also worth noting that if an inherited property is sold at no gain above probate value, no CGT charge typically arises. Our team can help you map out the options relevant to your situation, but decisions of this kind should always be taken with the involvement of a qualified tax adviser.