What Is the Difference Between Inheritance Tax and Capital Gains Tax?

Introduction

Inheritance Tax (IHT) and Capital Gains Tax (CGT) are two of the most common taxes that apply to property, investments, and other assets in the UK. They are often confused because both involve the value of assets changing hands, but they apply in very different situations.

Inheritance Tax is charged on the value of a person’s estate when they die, while Capital Gains Tax applies to profits made when you sell or dispose of an asset that has increased in value. Understanding the difference between the two helps with effective tax planning and avoids costly mistakes.

This article explains how each tax works, when it applies, and how to minimise your liability under both systems.

What Is Inheritance Tax?

Inheritance Tax is a tax on the total value of a person’s estate when they die. The estate includes property, savings, investments, and personal possessions.

The standard rate of IHT is 40%, but it only applies to the portion of the estate above the available tax-free allowances.

Key features of Inheritance Tax:

• Everyone has a nil-rate band of £325,000. The first £325,000 of an estate is tax free.

• If the estate includes a home left to children or grandchildren, an additional residence nil-rate band of up to £175,000 may apply.

• Married couples and civil partners can combine their allowances, potentially allowing up to £1 million to pass tax free.

• Gifts made within seven years of death may also be subject to IHT, depending on their size and timing.

Inheritance Tax is paid by the estate, usually before assets are distributed to beneficiaries.

What Is Capital Gains Tax?

Capital Gains Tax is a tax on the profit (gain) made when you sell, transfer, or dispose of an asset that has increased in value.

It applies to assets such as:

• Property (that is not your main home)

• Shares and investments

• Valuable items such as artwork, jewellery, or antiques

• Business assets

You are taxed only on the gain, not the total sale price. For example, if you bought an asset for £100,000 and sold it for £150,000, you would pay CGT on the £50,000 gain.

For the 2024 25 tax year:

• The annual CGT allowance is £3,000 per person. Gains below this amount are tax free.

• CGT rates for property are 18% for basic-rate taxpayers and 24% for higher- and additional-rate taxpayers.

• For other assets, the rates are 10% and 20%, depending on your income band.

Capital Gains Tax is paid by the individual who owns and sells the asset, not by an estate or beneficiary.

When Each Tax Applies

Situation Type of Tax Who Pays When It’s Due

Someone dies and leaves assets Inheritance Tax The estate Within 6 months of death
You sell or give away an asset that Capital Gains Tax The individual When the sale or disposal occurs
has increased in value disposing of the asset

Inheritance Tax deals with wealth being transferred on death, while Capital Gains Tax covers profits from selling assets during life or after inheritance.

How They Can Overlap

Inheritance Tax and Capital Gains Tax sometimes interact, but they do not apply to the same transaction at the same time.

For example:

• When someone dies, there is no CGT on assets in their estate. The beneficiaries inherit the assets at their market value on the date of death, known as the probate value.

• If the beneficiaries later sell those assets and the value has risen since inheritance, CGT applies on the gain made since the date of death.

So, IHT may apply when the estate passes on death, and CGT may apply later if the inherited asset is sold for more than its probate value.

Example Scenario

Helen dies leaving a house worth £400,000 to her son, David. The total value of her estate is £600,000.

• IHT may be due on £275,000 of the estate (£600,000 £325,000 allowance).

• David inherits the house at its market value of £400,000.

• Five years later, he sells the house for £480,000. The £80,000 profit is subject to CGT.

In this example, Inheritance Tax applies when Helen dies, and Capital Gains Tax applies only when David sells the property later.

Gifts During Lifetime

Gifts can also trigger both taxes in different ways:

• If you gift an asset and live for seven years after making the gift, it is exempt from Inheritance Tax.

• If you gift an asset that has increased in value, you may need to pay Capital Gains Tax immediately on the gain, unless an exemption or relief applies.

For example, gifting a rental property to your child counts as a disposal for CGT purposes, even if no money changes hands.

Key Differences Between IHT and CGT

Feature Inheritance Tax Capital Gains Tax

What it taxes The total value of an estate when someone dies The profit made from selling or gifting an asset

Who pays The estate (executors) The individual making the sale or gift

When due After death On disposal of the asset

Tax rates 40% (36% if donating to charity) 10%, 18%, 20%, or 24% depending on income and asset type

£325,000 nil-rate band (plus £175,000
Allowances residence band) £3,000 annual exempt amount

Reducing Your Tax Liability

There are several legal ways to minimise both IHT and CGT:

• Use annual gift and personal allowances.

• Transfer assets between spouses or civil partners (these transfers are free of both taxes).

• Use trusts or life insurance for estate planning.

• Claim available reliefs such as Private Residence Relief, Business Asset Disposal Relief, or Rollover Relief.

• Leave at least 10% of your estate to charity to reduce the IHT rate to 36%.

Professional advice ensures you take full advantage of exemptions and reliefs while staying compliant with HMRC rules.

The Role of an Accountant or Tax Adviser

An accountant can help you:

• Determine whether IHT or CGT applies to your situation.

• Calculate potential tax liabilities.

• Claim all available allowances and reliefs.

• Structure gifts or asset sales to minimise tax.

• Prepare and file returns on time.

This is particularly important for estates involving property, business assets, or investments, where tax rules can be complex.

Conclusion

Inheritance Tax and Capital Gains Tax are separate taxes that apply at different stages of asset ownership. Inheritance Tax is charged on the value of an estate when someone dies, while Capital Gains Tax applies to profits made when assets are sold or given away.

Understanding the distinction helps you plan effectively, make informed financial decisions, and reduce the amount of tax your estate or family may have to pay. Seeking advice from an accountant or tax specialist can ensure you make the most of available allowances and reliefs while staying compliant with UK tax law.