The Difference Between Inheritance Tax and Capital Gains Tax
Reviewed by Senior Personal Tax Specialist, Connor Masters ATT
Reviewed by Connor Masters ATT Connor Masters ATT LinkedIn
Connor is a Senior Personal Tax Specialist at RIFT, where he expertly handles tax returns for a diverse range of customers, including CIS workers, sole traders, and those with foreign income, renta...
Read More about Connor Masters ATTWhat's it all about?
This article's designed to help you:
- Understand the difference between Inheritance Tax and Capital Gains Tax.
- Make sure you're not paying more tax than you should.
- Keep yourself safely in HMRC's good books.
Inheritance Tax
When someone passes away, Inheritance Tax (IHT) comes into play, but there are thresholds and exemptions to consider. The standard IHT rate is 40%, applicable only if the estate's total value exceeds £325,000. However, certain conditions can reduce or eliminate IHT:
- Transfers to spouses, civil partners, charities, and amateur sports clubs are exempt from IHT.
- Passing your home to your children or grandchildren can increase the threshold to £500,000 if your estate is under £2 million. The unused portion can combine with your partner's, potentially reaching £1 million.
- Gifting assets before death can also affect IHT. If you give away more than £325,000 within seven years before your passing, your beneficiaries might face IHT, but the rate could be lower than 40%. An annual "gift exemption" of £3,000 allows tax-free giving while alive.
It's crucial to report any inheritance to HMRC, even if IHT doesn't apply. Typically, the estate itself covers IHT expenses, managed by the executor. However, additional taxes may arise from rental income if you inherit a rented property.
Find out the Inheritance tax hotspots and how high house prices hit even is passing to a child or grandchild.
Can I reduce the amount I pay?
The way you save money affects Inheritance Tax. Savings accounts and ISAs are fully taxed above the threshold. However, pensions under trust schemes are often exempt, but without trust, the exemption may not apply unless the beneficiary is a spouse or civil partner. Seek an Independent Financial Adviser for clarity.
Capital gains tax
Capital Gains Tax applies when you profit from selling or disposing of an asset that increased in value. The tax rate depends on your income level: 18% for basic rate taxpayers and 28% for higher rate taxpayers for properties; 10% and 20% for other assets. Chancellor Jeremy Hunt reduced the Annual Exempt Amount from £12,300 to £6,000 in 2023 and then to £3,000 in April 2024. Couples can combine their allowances to double the tax-free threshold.
What counts for capital gains tax?
Capital Gains Tax applies to tangible, movable items worth over £6,000, like artworks, jewellery, and machinery. Some exceptions: private cars, short-life assets under 50 years, and certain business-used assets. Determining applicability can be tricky, so seeking professional advice for clarity is advisable.
If you sell a business, or some of its assets, Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) allows you to pay a reduced Capital Gains Tax rate and maximise your profits when you sell up
When you sell or exchange cryptocurrencies, any profits made may be subject to capital gains tax on crypto in the UK.
You can read our beginners guide to capital gains tax as a good place to start.
Reporting Capital Gain
Your Capital Gains Tax liability is determined by your overall gains in a tax year. Losses offset gains, reducing the tax owed. The annual tax-free allowance doesn't carry over, but losses can offset future gains. Even if you owe no tax, report losses to HMRC, as they can offset future gains. Standard Self Assessment tax returns cover most gains, but property gains require a separate return. Timely reporting is crucial to avoid penalties.
If you sell a business, or some of its assets, Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) allows you to pay a reduced Capital Gains Tax rate and maximise your profits when you sell up
When you sell or exchange cryptocurrencies, any profits made may be subject to capital gains tax on crypto in the UK.
If you're not sure about whether you need to pay Capital Gains Tax check out our beginners guide.
Stop overpaying tax! Millions of pounds in tax refunds go unclaimed every year because people don't realise they're owed money.
Owing both Inheritance Tax & Capital Gains Tax
While it's uncommon, you can face both Inheritance Tax and Capital Gains Tax on the same assets, often due to timing. Quick sale after inheritance typically avoids this. Costs like estate agent and solicitor fees can offset gains, but general maintenance doesn't count. Proof of expenses is crucial for tax relief. The same system applies to all assets; if an asset gained £100,000, you'd pay Capital Gains Tax on that. If you spent £10,000 on improvements and fees, your taxable profit is now £90,000, and after the £12,300 allowance, you'd pay tax on the remaining £77,700 profit.
Read more about the differences between inheritance tax and capital gains tax.
If you decide to sell an inherited business, or some of its assets, then make sure you claim your Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) which allows you to pay a reduced Capital Gains Tax rate and maximise your profits when you sell up
Keep checking back here for more money tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.
What it all means:
- Beneficiary: The person who inherits the deceased person’s estate.
- Executor: The person appointed to administer the inheritance of the estate.
- Marginal tax rate: The tax you’ll owe on the next pound you earn in a tax year.
- Disposing of an asset: Selling, exchanging, giving away or claiming compensation for an asset.
