The Difference Between Inheritance Tax and Capital Gains Tax​

RIFT Roundup: The Essentials

• Inheritance Tax applies to an estate and certain lifetime transfers. The standard nil-rate band is £325,000, with an additional residence nil-rate band of up to £175,000 available in qualifying circumstances.

• Capital Gains Tax applies to gains. For 2026/27, individuals have a £3,000 Annual Exempt Amount and the main CGT rates are 18% and 24%.

• Death itself does not trigger Capital Gains Tax. An inherited asset is generally treated as being acquired at its market value at the date of death for CGT purposes.

• The two taxes can affect the same asset at different times. An estate might face Inheritance Tax based on the asset’s value at death, followed by Capital Gains Tax if the asset later increases in value and is sold.

Inheritance Tax and Capital Gains Tax can both become relevant when money, property or other assets change hands. They apply at different points and are calculated in different ways.

That distinction matters particularly when someone dies and their estate includes property, investments or other assets that may later be sold.

Here’s how the two taxes work under the rules in place as of September 2026.

What is Inheritance Tax?

Inheritance Tax, or IHT, is a tax that can apply to the estate of someone who has died.

An estate can include property, money, investments, possessions and certain other assets.

For the 2026/27 tax year, the standard Inheritance Tax nil-rate band remains £325,000. Subject to exemptions and reliefs, the standard rate is normally 40% on the part of an estate above the available tax-free thresholds.

There is also a residence nil-rate band of up to £175,000 where a qualifying home is passed to direct descendants, such as children or grandchildren.

The residence nil-rate band begins to reduce for estates worth more than £2 million.

Where all the relevant conditions are met, a qualifying individual estate may therefore be able to pass on up to £500,000 before IHT becomes due.

Unused nil-rate bands can also usually be transferred between spouses or civil partners. This means a qualifying estate after the second death can potentially have combined thresholds of up to £1 million.

These figures don’t mean every £500,000 or £1 million estate is automatically free from IHT. The available threshold depends on the estate, who inherits it, previous transfers and whether the conditions for the relevant allowances are met.

Who normally pays Inheritance Tax?

Inheritance Tax is normally dealt with by the personal representatives of the estate, such as the executors named in a will.

Where tax is due, it is generally paid from the estate before assets are distributed to beneficiaries.

Someone receiving an inheritance does not usually have to pay Income Tax simply because they inherited money or property.

Tax can become relevant later. For example, rental income from an inherited property can be taxable, while selling an inherited asset after it has increased in value can lead to Capital Gains Tax.

There are also circumstances where a beneficiary can become responsible for Inheritance Tax, particularly in relation to certain lifetime gifts, so the exact position depends on the facts.

How do gifts affect Inheritance Tax?

Gifts made during someone’s lifetime can affect the IHT calculation.

The annual gift exemption is currently £3,000 per tax year. Any unused annual exemption can be carried forward for one tax year.

There are also separate exemptions for certain small gifts, wedding or civil partnership gifts and regular gifts made from surplus income where the conditions are met.

The seven-year rule is particularly important. In general, a gift may fall outside the donor’s estate for IHT if they survive for seven years after making it.

If they die within seven years, the gift may need to be considered when the estate is calculated.

Taper relief can reduce the tax charged on certain gifts made more than three years before death. It only becomes relevant where the value of chargeable gifts within the seven-year period exceeds the £325,000 nil-rate band.

What about pensions and Inheritance Tax?

This is an area where the rules are changing.

As at August 2026, the current rules continue to apply where a pension scheme member dies before 6 April 2027.

However, Finance Act 2026 has introduced a major change for deaths on or after 6 April 2027. From that date, most unused pension funds and pension death benefits will be brought within the value of the deceased person’s estate for Inheritance Tax purposes.

There are exclusions, and HMRC is continuing to publish detailed guidance ahead of implementation.

Anyone making estate-planning decisions involving pensions should therefore make sure they are working from guidance that reflects the date of death and the rules then in force.

What is Capital Gains Tax?

Capital Gains Tax, or CGT, can apply when you sell, give away, exchange or otherwise dispose of an asset that has increased in value.

You are normally taxed on the gain, rather than the full amount you receive.

For the 2026/27 tax year, an individual’s Capital Gains Tax Annual Exempt Amount is £3,000.

For gains made from 6 April 2026, the main CGT rates for individuals are:

• 18% on gains falling within the unused basic-rate Income Tax band

• 24% on gains above it

The amount of CGT you pay therefore depends partly on your other taxable income.

Different rules and reliefs can apply to particular assets and circumstances. For example, qualifying gains covered by Business Asset Disposal Relief are taxed at 18% from 6 April 2026.

What types of assets can be subject to Capital Gains Tax?

CGT can apply to assets including:

• property that is not fully covered by Private Residence Relief

• shares and investments held outside tax-exempt arrangements

• cryptocurrency

• business assets

• valuable personal possessions

Personal possessions with a disposal value of more than £6,000 can fall within the CGT rules, although there are exemptions and special rules.

Private cars are normally exempt from CGT.

What happens to Capital Gains Tax when someone dies?

There is no Capital Gains Tax charge simply because someone dies.

Instead, assets passing on death are generally treated as being acquired by the personal representatives or beneficiaries at their market value at the date of death.

That value becomes important if the asset is later sold.

For example, imagine you inherit a property valued at £300,000 at the date of death.

You later sell it for £320,000 and have £5,000 of allowable selling costs.

The starting gain would normally be:

£320,000 sale price
minus £300,000 date-of-death value
minus £5,000 allowable costs
= £15,000 gain

If you had no other gains or allowable losses and were entitled to the full £3,000 Annual Exempt Amount, £12,000 would remain chargeable to CGT.

The actual tax rate would then depend on your taxable income and circumstances.

Can Inheritance Tax and Capital Gains Tax apply to the same property?

Yes, but generally at different stages.

Inheritance Tax may be calculated using the property’s value at the date of death.

If the property later rises in value and is sold, Capital Gains Tax may apply to the increase since the date-of-death valuation.

A quick sale after inheritance does not automatically mean there will be no CGT. The sale price, probate value, allowable costs, losses and available Annual Exempt Amount all need to be considered.

How do you report Capital Gains Tax?

Reporting deadlines depend on what has been sold.

Where CGT is due on the disposal of UK residential property, it generally needs to be reported and paid within 60 days of completion.

Other gains can usually be reported through Self Assessment or, where available, HMRC’s real-time Capital Gains Tax service.

Keeping evidence of purchase values, valuations, sale proceeds, professional fees, improvement costs and relevant reliefs can make the calculation much easier.

Frequently asked questions

Do I pay Capital Gains Tax when I inherit a property?

There is normally no CGT charge simply because you inherit the property. CGT may become due if you later sell or dispose of it for more than its relevant date-of-death value, after allowable costs, losses, reliefs and the Annual Exempt Amount have been taken into account.

Do I personally pay Inheritance Tax on money I inherit?

Usually, the estate’s personal representatives deal with IHT before the inheritance is distributed. There are exceptions, particularly for certain lifetime gifts.

Can a married couple combine their CGT allowances?

Each individual has their own Annual Exempt Amount. It isn’t a single combined household allowance. Transfers between spouses and civil partners who are living together are normally made on a no-gain, no-loss basis, subject to the relevant rules.

Are ISAs exempt from Inheritance Tax?

ISA tax advantages do not generally make the underlying value automatically exempt from IHT. The value can still form part of the estate, although special rules can apply for surviving spouses and civil partners.

When should I get professional advice?

Estate tax can become complicated where there are large gifts, trusts, businesses, overseas assets, pensions, multiple properties or questions over valuations. A suitably qualified tax adviser, solicitor or financial adviser can help establish how the rules apply to a particular estate.