IHT and Capital Gains Tax UK: How Inheritance Tax and CGT Interact on Gifts, Death, and Inherited Assets (2026)
A lifetime gift triggers CGT (deemed disposal at market value) and starts the IHT seven-year clock. Death is not a CGT disposal — assets are rebased to probate value (s62 TCGA 1992), wiping all pre-death gains — but IHT applies on the estate. Understanding which tax bites when is the foundation of estate planning.
| Event | CGT? | IHT? | Notes |
|---|---|---|---|
| Lifetime gift to individual | Yes | PET (7yr) | CGT at market value; IHT if donor dies within 7yrs |
| Lifetime gift to trust | Yes (or gift relief) | CLT (immediate) | Gift relief available; IHT charged immediately at 20% above NRB |
| Death — asset in estate | No — rebase | Yes — estate | s62 TCGA 1992 rebase; IHT at 40% above NRB |
| Beneficiary sells inherited asset | Yes (above probate) | No | CGT gain = sale price minus probate value |
| Spouse transfer (lifetime) | No (no-gain/no-loss) | No (exempt) | s58 TCGA + s18 IHTA — fully tax-free |
| Gift with BPR + gift relief | Deferred | PET (BPR may re-qualify) | Gain held over to recipient; IHT PET on business asset |
IHT and CGT — How They Interact
The fundamental difference: CGT taxes gains, IHT taxes transfers
Capital Gains Tax (CGT) charges the gain realised on a disposal of an asset — the difference between the disposal proceeds (or market value on deemed disposal) and the base cost (original acquisition cost plus qualifying expenditure). CGT applies during life. Inheritance Tax (IHT) charges the transfer of value from one person's estate to another — on death, the estate is valued and IHT is levied on the excess above the NRB. IHT applies on death (and on certain lifetime chargeable transfers). Both taxes can bite on the same asset in the same lifetime, but they typically bite at different times and on different events: CGT bites on a lifetime gift; IHT (PET or immediate charge) records the gift; if the donor dies within seven years, IHT bites too. On death, IHT bites on the estate; CGT does not bite (death is not a disposal). The interaction between the two taxes is one of the most misunderstood areas of estate planning — particularly the 'rebase on death' rule that eliminates embedded CGT gains when assets are held until death.
CGT on lifetime gifts: deemed disposal at market value
When an asset is given away during the donor's lifetime, it is treated as a disposal for CGT purposes at the asset's market value at the date of the gift — regardless of whether any money changes hands (s17 TCGA 1992). The gain is: market value at gift date minus base cost (original purchase price plus qualifying improvement expenditure). This gain is taxed at the donor's CGT rate: 18%/24% for residential property (from October 2024); 18%/24% for other chargeable assets (Finance Act 2024 rates, also from October 2024). The gift simultaneously starts the IHT seven-year clock as a Potentially Exempt Transfer (PET). If the donor survives seven years, the PET becomes fully exempt. If the donor dies within seven years, the PET is brought back into IHT calculations. So a lifetime gift can trigger both an immediate CGT liability and a potential future IHT liability (if the donor does not survive). Annual CGT exemptions (£3,000 for 2024/25 and 2025/26 onwards) can offset small gains. For larger gifts, the combined CGT and potential IHT burden can exceed simply retaining the asset and paying IHT on death.
Death is not a CGT disposal: the rebase on death
The most important CGT/IHT interaction rule is the rebase on death under s62 TCGA 1992: when a person dies, their assets do not undergo a CGT disposal. The assets pass to the estate (or directly to beneficiaries) with their base cost reset ('rebased') to their market value at the date of death (the probate value). This means: all embedded CGT gains accumulated during the deceased's lifetime are wiped out — there is no CGT on the death of the owner. The beneficiary acquires the asset at its probate value as the new base cost. If the beneficiary later sells the asset, CGT is charged only on the gain above the probate value — not the original cost to the deceased. This rebase is a significant advantage of retaining assets until death: a £1m property bought for £100,000 would have a £900,000 embedded gain during life. Give it away during life: CGT at 24% = £216,000. Retain until death: CGT = nil (rebase); IHT at 40% on £1m above NRB applies. The estate pays IHT; the beneficiary gets the property at its £1m probate value and faces CGT only if it rises further above that. Whether retaining to death or gifting during life is better depends on the specific CGT rate, IHT rate, likelihood of the PET surviving seven years, and the expected future growth of the asset.
Spousal transfers: CGT no-gain/no-loss
Transfers between spouses and civil partners during lifetime are treated as made at 'no gain/no loss' for CGT purposes — the transferring spouse is treated as receiving proceeds equal to the original base cost (s58 TCGA 1992). No CGT arises on the transfer. The receiving spouse takes over the transferring spouse's original base cost — the gain is deferred, not eliminated. On death, the surviving spouse inherits assets at their date-of-death probate value (rebase under s62). If assets are transferred between spouses during life and then the receiving spouse later sells, they will use the original base cost of the transferring spouse — potentially resulting in a larger gain than if the asset had been sold directly. The rebase on death eliminates this concern if the receiving spouse holds the assets until death. IHT: inter-spousal transfers are fully exempt from IHT during life and on death (s18 IHTA 1984). So a gift from one spouse to another triggers neither CGT (s58 no-gain/no-loss) nor IHT (s18 exemption) — making inter-spousal transfers the most tax-efficient route for rebalancing asset ownership between spouses.
Gift relief: deferring CGT on business asset gifts
Where an asset qualifies for gift relief (also called 'holdover relief') under s165 TCGA 1992, the donor can defer the CGT that would otherwise arise on a lifetime gift. Gift relief is available on: (1) business assets — shares in unlisted trading companies, sole trader business assets, partnership interests; (2) gifts that are immediately chargeable for IHT (e.g. gifts into trust — which are Chargeable Lifetime Transfers, not PETs). The relief works by reducing the recipient's base cost by the gain deferred — so the recipient takes on the donor's latent CGT liability. Gift relief does NOT apply to investment assets (investment property, listed shares, cash, investment company shares). For business assets where BPR also applies (and therefore no IHT on the gift), gift relief can be combined: the gift is a PET (no immediate IHT, seven-year clock); gift relief defers the CGT; the recipient holds the asset with a low base cost (donor's original cost, reduced by the held-over gain). If the recipient is a connected party, they inherit the embedded CGT gain — but if they retain the asset, the gain can be deferred further. Gift relief claim: both donor and donee must sign the election jointly on form HS295.
Selling inherited assets: CGT on gains above the probate value
When a beneficiary inherits an asset and later sells it, CGT is charged only on the gain above the probate value — the value at the date of death at which the asset was included in the IHT estate. Example: a beneficiary inherits a property with a probate value of £400,000. They sell it two years later for £500,000. CGT is charged on £100,000 (the gain above probate value). The beneficiary's CGT rate (18% or 24% for residential property) applies. The beneficiary's annual CGT exempt amount (£3,000 for 2024/25 onwards) can offset the gain. No CGT on the pre-death gain is paid by the beneficiary — this was rebased at death. Timing of sale after inheritance matters: if the property market rises significantly after the date of death, CGT liability for the beneficiary grows. Selling quickly after probate (before the market rises) minimises CGT for the beneficiary. An HMRC concession (ESC D5) provides that where a property sold during estate administration fetches less than the probate value, the executor can claim an adjustment to the IHT valuation — reducing both the IHT paid and the beneficiary's base cost.
The gift-versus-retain decision: CGT vs IHT
The central question in estate planning is often whether to gift assets during life (triggering CGT but starting the IHT clock) or retain until death (rebasing for CGT but paying full IHT on estate value). Key factors in the decision: (1) The size of the embedded CGT gain: a large pre-existing gain makes gifting expensive now; retaining to death wipes the gain. (2) The donor's life expectancy: the longer the donor lives, the more likely a PET survives seven years; the rebase on death becomes more valuable if death is expected soon. (3) The tax rates: current CGT rates (18/24%) vs IHT rate (40%); if the asset is investment property, IHT is likely higher per pound of gain than CGT. (4) Future growth expectations: if the asset is expected to grow significantly in value, gifting now locks in a lower CGT bill; retaining means the entire future value is in the IHT estate. (5) The recipient's plans: if the recipient will sell immediately, the rebase benefit (from holding to death) is best; if the recipient will hold long-term, gifting starts their base cost at today's value. This decision should be modelled with specific numbers — general rules can be misleading. A tax adviser can model the 'gift now vs. retain to death' comparison for each asset.
Frequently Asked Questions
Do you pay Capital Gains Tax when you inherit an asset in the UK?
No. Death is not a CGT disposal in the UK (s62 TCGA 1992). When someone dies, their assets are 'rebased' to their market value at the date of death — the beneficiary inherits them at the probate value as the new base cost. No CGT is charged on any gains that accumulated during the deceased's lifetime. CGT only applies when the beneficiary later sells the inherited asset — and only on gains above the probate value (the rebased base cost), not the original purchase price.
If I give an asset away as a gift, do I pay Capital Gains Tax?
Yes — a lifetime gift is treated as a disposal at market value for CGT (s17 TCGA 1992). The CGT gain is: market value at date of gift minus your original base cost. CGT is charged at 18%/24% for residential property and 18%/24% for most other assets (rates from October 2024). You may be able to claim gift relief (s165 TCGA 1992) on qualifying business assets or gifts into trust — which defers the CGT to the recipient. The gift also starts the IHT seven-year PET clock. Annual CGT exempt amount (£3,000) can offset small gains.
Is it better to give assets away before death or leave them in the estate for IHT purposes?
It depends on the size of the embedded CGT gain, your life expectancy, and the tax rates. Gifting: triggers CGT now; starts seven-year IHT clock (PET exempt after 7 years); gift relief available on business assets. Retaining: no CGT (rebase on death wipes all pre-death gains); full 40% IHT on estate value. For assets with large embedded gains, retaining to death often saves more tax overall (CGT wipe outweighs IHT cost) — unless the donor is confident of surviving seven years and the asset will continue to grow. Model the numbers with a tax adviser for each specific asset.
What is the CGT rebase on death?
Section 62 TCGA 1992 provides that when a person dies, they are not treated as making a disposal of their assets. Instead, the assets pass to the estate at their market value on the date of death — this is the 'rebase to probate value'. All CGT gains accumulated during the deceased's lifetime are wiped out. The beneficiary or estate acquires the asset at the probate value and faces CGT only on post-death growth above that value if they later sell. This is one of the most valuable CGT reliefs available — retaining highly appreciated assets until death permanently eliminates the embedded CGT.
Do spouses pay CGT when transferring assets between each other?
No — transfers between spouses and civil partners during lifetime are at no-gain/no-loss for CGT (s58 TCGA 1992). No CGT arises on the transfer. The receiving spouse takes on the original base cost of the transferring spouse. On death, the rebase applies — so the surviving spouse inherits assets at their date-of-death probate value, eliminating any pre-death CGT gain. IHT: inter-spousal transfers are also fully exempt (s18 IHTA 1984). This makes rebalancing asset ownership between spouses entirely tax-free for both CGT and IHT purposes.
Plan Now — While You Have Time to Choose
The gift-versus-retain decision is time-sensitive: once capacity is lost or death is imminent, the options narrow sharply. A will records your wishes for what remains in the estate; your wider plan — which assets to gift, when, and to whom — determines the combined CGT and IHT outcome. WillSafe will kits for England and Wales are the starting point.
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