CGT (Capital Gains Tax) and IHT (Inheritance Tax) are separate UK taxes that both touch wealth transfer at death, but differ on every axis. CGT is on the gain when an asset is disposed of — 18% basic rate / 24% higher rate for non-property in 2026/27. IHT is on the value of an estate above £325,000 (nil rate band) + £175,000 (residence nil rate band where applicable) — at 40%. The base cost reset means CGT on gains during a deceased's lifetime is wiped at death — so an estate is normally subject to IHT only, not both. Gifts within 7 years of death can be exposed to BOTH if the donor dies within the 7-year period.
Side by side
| CGT | IHT | |
|---|---|---|
| What's taxed | Gain on disposal of an asset | Value of estate at death |
| Who pays | The person disposing | The estate (then heirs receive net) |
| Annual allowance | £3,000 (2026/27) | Nil-rate band £325,000 + RNRB up to £175,000 |
| Rates | 18% basic / 24% higher (non-property); 18%/24% property; 24% trusts | 40% above nil-rate (36% if 10% to charity) |
| Spouse / civil partner | No CGT on transfer between spouses | No IHT on transfer between spouses (unlimited) |
| Gifting strategy | Gain crystallises (CGT due) | 7-year PET clock starts |
| At death | CGT extinguished on assets in estate (base cost reset) | IHT crystallises on death |
The base cost reset
The single most important interaction between CGT and IHT: assets held until death receive a "stepped-up" cost basis equal to the market value at the date of death. The deceased's accumulated lifetime CGT is wiped, never taxed.
Why this matters in planning:
- Hold appreciating assets until death. If you have an asset with a large embedded gain (e.g. shares bought decades ago), selling in your lifetime crystallises the gain at 18%/24%. Holding until death wipes the CGT entirely. The estate pays IHT instead — but only on the value above the nil-rate band.
- Gifting alternatives. Gifting in your lifetime (a "Potentially Exempt Transfer") doesn't have CGT exemption — the gift is treated as a disposal at market value. You crystallise the CGT (at 18%/24%) AND start the 7-year IHT clock. If you die within 7 years, both CGT and IHT may apply.
The 7-year PET rule (the interaction zone)
Lifetime gifts that exceed the £3,000/year annual gift allowance start a 7-year clock. If the donor survives 7 years, the gift is fully outside the estate for IHT. If they die within 7 years, the gift is added back to the estate, with taper relief on the IHT:
| Years between gift and death | Taper relief on IHT |
|---|---|
| 0–3 years | 0% (full 40%) |
| 3–4 years | 20% relief (32% effective) |
| 4–5 years | 40% relief (24% effective) |
| 5–6 years | 60% relief (16% effective) |
| 6–7 years | 80% relief (8% effective) |
| 7+ years | 100% relief (0%) |
And — separately — the CGT on the gift itself was paid when the gift was made (no rebate if you die within 7 years). So a gifted appreciated asset can be doubly taxed if death is within 3 years.
Worked example: gifting vs holding
£500,000 of shares bought in 2000 for £100,000. Gift to son in 2025; donor dies in 2028.
| Gift in 2025: CGT crystallised (gain £400k − £3k allowance) | |
| CGT at 24% | £95,280 |
| Gift counts as PET. Death in 2028 (3 years later) → 100% IHT applies | |
| IHT on £500k gift (at 40%, allowance used elsewhere) | £200,000 |
| Total tax paid | £295,280 |
Same shares held until death in 2028, then inherited by son
| Base cost reset at death (£500k market value) | |
| CGT extinguished | £0 |
| IHT on £500k estate value (at 40%) | £200,000 |
| Total tax paid | £200,000 |
Saving by holding rather than gifting: £95,280. The 7-year PET clock is only useful when the asset has limited unrealised gain, or when you're confident in 7+ year survival.
The 2027 IHT-on-pensions reform
From April 2027, unused defined-contribution pension pots will be brought into the IHT estate. This represents one of the largest UK tax changes in a generation:
- Currently, pensions are outside the estate — they pass IHT-free to beneficiaries.
- From 2027, pension pots remaining at death will be added to the estate for IHT calculation.
- Tax-free lump sums withdrawn during lifetime remain outside the estate.
- The change is expected to push tens of thousands of estates into IHT.
This makes pension lump-sum withdrawal in lifetime more attractive, especially for those near or over IHT thresholds. See the dedicated pension reform guide (forthcoming).
Spouse and civil partner exemptions
Both CGT and IHT exempt transfers between spouses and civil partners:
- CGT: No CGT on transfer. The receiving spouse takes over the cost basis (not the market value at transfer date).
- IHT: No IHT on transfer, with unlimited exemption.
This makes spousal transfers a key planning tool: using both partners' £3,000 CGT allowances, both nil-rate bands (£650k combined plus up to £350k combined RNRB), and equalising estates before death.
Sources and methodology
The rules above follow HMRC's CGT guidance and IHT guidance. For estate-specific planning, see the tax adviser recommendation. The methodology page documents sources.
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