Inheritance Tax vs Capital Gains Tax
Understanding the differences and interactions between these two important taxes
| Inheritance Tax (IHT) | Capital Gains Tax (CGT) |
|---|---|
| What it taxes: Transfers of wealth (on death; some lifetime transfers). | What it taxes: Increases in value on disposal (sale, gift, certain exchanges). |
| When it applies: On death; lifetime gifts (PET/CLT) and some trust charges. | When it applies: When you dispose of an asset. No CGT on death. |
| Charge base: Value transferred (estate value after reliefs). | Charge base: Gain = proceeds (or market value) minus allowable cost. |
| Key reliefs: Spouse/civil partner exemption; NRB/RNRB; APR/BPR. | Key reliefs: Principal Private Residence (main home); spouse no-gain/no-loss; hold-over relief for certain gifts; annual exempt amount. |
| Who pays: Usually the estate/PRs (or donee for some failed PETs/CLTs). | Who pays: The person disposing (or PRs/beneficiaries when they dispose). |
| Typical forms: IHT400 (+ IHT403 etc.). | Typical forms: SA108 / Self Assessment; 60-day UK property return where required. |
| Timing: Due by end of the 6th month after month of death (interest daily simple). | Timing: CGT due via 60-day return for UK property; otherwise via SA deadlines. |
Death vs Lifetime: How the Taxes Apply
On death: There is no CGT charge. Assets re-base to market value at the date of death for CGT going forward. IHT may be due on the estate value after reliefs.
During lifetime: Gifts can be IHT-relevant (PET/CLT) and also count as CGT disposals at market value unless a relief defers the gain.
Common Scenarios
Here are typical situations where both taxes interact and how to think about them:
Inheriting shares/property
No CGT at death; beneficiary/PRs hold at market value at death. Subsequent sale can trigger CGT on the post-death gain; IHT (if any) already assessed on the estate.
Gifting the main home you still live in
IHT side may be a PET/GWR risk; CGT side PPR relief may protect gains if it's your main residence (watch GWR/POAT if you continue to benefit).
Gifting a rental/investment property to an adult child
IHT PET (or CLT to a trust); CGT disposal at market value likely → CGT due now, IHT risk for 7 years (taper applies to tax, not value).
Putting unquoted shares or a business into a trust
IHT may be a CLT (with potential BPR). CGT may be deferred using hold-over relief (see Reliefs below), so the gain moves with the asset.
Key Reliefs That Change Outcomes
Both taxes offer reliefs that can significantly reduce or eliminate charges. Understanding which reliefs apply to your situation is crucial for effective planning.
- • Spouse/civil partner exemption (UK-domicile rules may cap where relevant)
- • NRB/RNRB (RNRB needs a qualifying home to pass to direct descendants; £2m taper applies)
- • APR/BPR for qualifying agricultural/business assets (rates and combined allowance rules apply)
- • Principal Private Residence (PPR) for your main home (conditions/periods apply)
- • Spouse/civil partner transfers: no gain/no loss while living together (base cost transfers)
- • Hold-over relief: Defers gains on certain business assets and chargeable transfers to trusts (the donee/trust takes a reduced base cost)
- • Annual exempt amount (use current year's figure if you show numbers elsewhere on the site)
The same transaction can create CGT now and IHT later (e.g., gifting an investment property). Planning tools include:
- • Using spouse transfers first (to access allowances/reliefs)
- • Checking hold-over eligibility for business assets/trust gifts
- • Timing disposals to use allowances/bands
The Stepped-Up Basis Rule
One of the most important interactions between these taxes is the "stepped-up basis" rule. When someone inherits an asset, its cost basis for capital gains tax purposes is reset to its value at the date of death.
Example: Inherited Property
If the beneficiary sells immediately for £400,000, there's no capital gains tax to pay, even though the original owner would have faced a large CGT bill.
Reporting & Deadlines
IHT
File IHT400 (and schedules such as IHT403) by the statutory deadlines; tax due by the end of the 6th month after the month of death; interest is daily simple.
CGT
UK residential property disposals normally require a 60-day CGT return and payment. Other disposals are reported via Self Assessment (SA108). Consider payments on account to limit interest.
From 6 April 2025, IHT uses a residence-based test for worldwide assets (long-term UK residence), replacing most domicile-based rules for new events. CGT continues to follow residence/situs rules (e.g., non-residents can still be chargeable on UK land disposals). Keep your page's separate domicile/residence guides aligned with this distinction.
Tax Rates and Thresholds Comparison
The rates and thresholds for each tax are significantly different, affecting planning strategies.
Additional Planning Examples
Here are more detailed scenarios showing how both taxes interact in practice:
A family business may qualify for 100% Business Property Relief from inheritance tax, but selling shares could trigger capital gains tax.
Buy-to-let properties face both inheritance tax at death and capital gains tax when sold by beneficiaries.
Large share portfolios may face inheritance tax, but beneficiaries get stepped-up basis for future disposals.
Do
- • Map which tax applies first
- • Check reliefs for both IHT and CGT
- • Keep valuations and dates
- • Consider spouse transfers/hold-over before gifting
- • Diarise 60-day CGT deadlines for UK property
Don't
- • Assume death triggers CGT
- • Gift investment assets without checking CGT now + IHT 7-year effects
- • Forget GWR/POAT where you keep benefiting from a gifted asset
Professional Advice
The interaction between inheritance tax and capital gains tax can be complex, particularly when multiple reliefs and exemptions are available. Professional advice is often essential to optimize your position and ensure compliance with both tax regimes.