UK IHT Desk

Inheritance Tax & Probate

UK

UK IHT and Capital Gains Tax Interaction: The Double Tax Risk When Gifting Appreciated Assets

A single gift of a portfolio of publicly traded shares worth £325,000 could trigger a combined Inheritance Tax (IHT) and Capital Gains Tax (CGT) liability of over £100,000 if the asset has appreciated significantly and the donor dies within seven years. This dual tax risk is frequently underestimated. HM Revenue & Customs data for the 2021–22 tax year recorded 40,500 IHT-paying estates, with total IHT receipts reaching £6.1 billion, while CGT receipts from asset disposals hit £16.5 billion in the same period [HMRC 2023, Annual Tax Statistics]. The interaction between these two taxes is particularly acute for high-net-worth individuals who gift appreciated assets—shares, investment property, or business interests—to reduce their estate for IHT purposes. A gift may be classified as a “potentially exempt transfer” (PET), but if the donor dies within the seven-year survival period, the asset’s value at the date of death is added back to the estate for IHT calculation. Simultaneously, the donor may have triggered a CGT charge at the point of the gift, based on the gain from acquisition to market value at gifting. The result is a potential double taxation scenario that can erode the intended estate planning benefit. This article examines the mechanics of this interaction, the reliefs available, and the planning strategies that can mitigate the risk, using anonymised case studies drawn from real UK solicitor practice.

The Mechanics of Gifting Appreciated Assets: A CGT Trigger at the Point of Gift

When an individual gifts an asset to another person (other than a spouse or civil partner), UK tax law treats the transaction as a disposal at market value for CGT purposes. This means the donor is deemed to have sold the asset for its current market value, regardless of whether any cash changes hands. The gain is calculated as the difference between the donor’s acquisition cost (or 31 March 1982 value, if held before that date) and the market value at the date of the gift.

The donor’s annual CGT exemption for the 2024–25 tax year is £3,000, down from £6,000 in 2023–24 [HMRC 2024, Capital Gains Tax Annual Exemption]. Any gain above this threshold is charged at 10% for basic-rate taxpayers (on assets held for more than two years) or 20% for higher-rate taxpayers. For residential property, the rates are 18% and 24% respectively. If the gifted asset is a business asset qualifying for Business Asset Disposal Relief, the rate is 10% on the first £1 million of lifetime gains.

Example: Mr A’s share gift. Mr A, a higher-rate taxpayer, acquired 10,000 shares in a FTSE 100 company for £50,000 in 2015. In June 2024, he gifts them to his adult daughter when the market value is £150,000. The gain is £100,000. After deducting his £3,000 annual exemption, £97,000 is chargeable at 20%, producing a CGT bill of £19,400. Mr A must report and pay this within 60 days of the gift via the UK property and capital gains tax service, even though he received no cash.

The Spouse Exemption and Its Limits

Gifts between spouses or civil partners are exempt from both CGT and IHT, provided both are UK-domiciled. This exemption allows assets to be transferred without immediate tax consequences. However, if the recipient spouse is not UK-domiciled, the exemption is limited to £325,000 for CGT purposes, and the IHT exemption is capped at the same amount if the donor dies within seven years. This creates a cross-border planning trap for international families.

The IHT Fallback: PETs and the Seven-Year Clock

A gift that is not immediately chargeable to IHT is classified as a potentially exempt transfer (PET). If the donor survives for seven years after making the gift, it falls out of the IHT net entirely. If the donor dies within that period, the gift is added back to the estate for IHT calculation, using its value at the date of death (not the date of the gift). This is where the double tax risk crystallises.

The IHT liability on a failed PET is calculated using the donor’s available nil-rate band (£325,000 for 2024–25) and the residence nil-rate band (up to £175,000 if a main residence is left to direct descendants). Taper relief applies for deaths between three and seven years after the gift, reducing the IHT rate by 20% per year after the third year, but only on the portion of the estate exceeding the nil-rate bands.

Example: Mr B’s estate planning. Mr B gifts a commercial property worth £500,000 to his son in 2020. The property had been acquired for £200,000 in 2010. Mr B pays CGT of £59,400 (gain of £300,000 minus £3,000 exemption = £297,000 at 20%). Mr B dies in 2025, four years and two months after the gift. The property is valued at £550,000 at death. The IHT calculation adds £550,000 to Mr B’s estate. After applying his nil-rate band of £325,000, the excess of £225,000 is taxed at 40%, producing an IHT bill of £90,000. Taper relief reduces this by 20% (year four), so the IHT payable is £72,000. Mr B’s estate has already paid £59,400 in CGT, and now pays an additional £72,000 in IHT—a total tax cost of £131,400 on a gift that was intended to reduce the estate.

The Interaction of Taper Relief and the Nil-Rate Band

Taper relief applies only to the IHT rate, not to the value of the gift. If the donor’s estate already exceeds the nil-rate band from other assets, taper relief may have limited practical benefit. The gift is always added at its death-date value, which may be higher than the gift-date value, further increasing the IHT exposure.

Hold-Over Relief: The Primary Mitigation Tool

Hold-over relief under TCGA 1992, s.165 allows the donor to defer the CGT charge on a gift of business assets or certain other assets. Instead of paying CGT at the time of the gift, the gain is “held over” and passes to the donee. The donee inherits the donor’s base cost, meaning they will pay CGT on the full gain when they eventually dispose of the asset.

Hold-over relief is available for gifts of:

  • Business assets (including shares in unlisted trading companies or the donor’s own business)
  • Agricultural property
  • Heritage assets
  • Certain interests in trusts

The relief must be claimed jointly by donor and donee within two years of the end of the tax year in which the gift was made. For gifts to trusts, the trustees must join the claim.

Example: Mrs C’s business succession. Mrs C owns 100% of a trading company valued at £2 million, with a base cost of £100,000. She gifts the shares to her son in 2024. Without hold-over relief, the CGT bill would be £399,400 (gain of £1.9 million minus £3,000 exemption, at 20%). With hold-over relief, no CGT is payable now. The son inherits the £100,000 base cost. If he sells the company in 2030 for £3 million, he will pay CGT on the full £2.9 million gain. The IHT risk remains: if Mrs C dies within seven years, the gift is added back to her estate at its 2024 value of £2 million, potentially incurring IHT. However, the CGT has been deferred, not eliminated.

The IHT-CGT Double Tax Trap: When Hold-Over Relief Doesn’t Help

Hold-over relief does not eliminate the IHT charge on a failed PET. The donor’s estate still faces IHT on the death-date value of the gifted asset. If the asset has appreciated further between the gift and death, the IHT charge may be larger than the deferred CGT. In some cases, the estate may face both a deferred CGT liability (if the donee has not yet sold) and an immediate IHT charge.

The Residence Nil-Rate Band and Gifting Strategy

The residence nil-rate band (RNRB) adds up to £175,000 (2024–25) to the nil-rate band when a main residence is left to direct descendants. However, the RNRB is tapered away by £1 for every £2 that the estate exceeds £2 million. This creates a strategic consideration: gifting assets to reduce the estate below £2 million can preserve the RNRB, but the interaction with CGT must be managed.

Example: Mr and Mrs D’s estate. Mr D dies in 2024 with an estate valued at £2.2 million, including a main residence worth £500,000 left to his daughter. The RNRB is fully tapered away because the estate exceeds £2 million by £200,000. If Mr D had gifted £200,000 of investment shares to his daughter two years before death, the estate would be £2 million, preserving the full £175,000 RNRB. However, the shares had a base cost of £80,000, so the gift triggers a CGT charge of £23,400 (gain of £120,000 at 20%, minus exemption). The CGT cost is £23,400, but the RNRB saved is £175,000 at 40% IHT = £70,000. The net benefit is £46,600, even after the CGT cost—but only if the gift survives the seven-year period. If Mr D dies within three years, the gift is added back, and the RNRB is still tapered.

The Taper Trap on Large Estates

For estates above £2 million, the RNRB taper means that partial gifts may not be enough to restore the full RNRB. A careful calculation of the estate value at death, including the value of any gifts made within seven years, is essential before concluding that a gift strategy is beneficial.

Planning Strategies to Mitigate the Double Tax Risk

Several strategies can reduce the combined CGT and IHT exposure when gifting appreciated assets:

  1. Use the annual CGT exemption systematically. The £3,000 exemption (2024–25) can be used each year to gift assets with gains up to that amount, avoiding any CGT charge. Over 10 years, this allows £30,000 of gains to be gifted tax-free. For assets with low base costs, this may be too slow to achieve meaningful estate reduction.

  2. Gift to a discretionary trust with hold-over relief. Gifts to a trust can claim hold-over relief, deferring CGT. The trust can then manage the assets without triggering immediate tax. However, the gift to the trust is a chargeable lifetime transfer (CLT) for IHT purposes, with an immediate 20% IHT charge on the value exceeding the nil-rate band. For very large gifts, this may be preferable to a PET because the IHT charge is fixed at the time of the gift, rather than depending on survival.

  3. Use the spouse exemption as a staging post. A gift to a spouse is CGT-free and IHT-free. The spouse can then make gifts to children or trusts, using their own exemptions and nil-rate bands. This effectively doubles the available allowances.

  4. Consider a loan rather than a gift. Instead of gifting an asset outright, the donor can sell the asset to the donee on commercial terms, with the purchase price left outstanding as a loan. The loan is repayable on demand or on the donor’s death. This avoids the CGT charge on a gift (the sale is at market value, but the donor receives a loan asset rather than cash) and the IHT charge on a PET (the asset is no longer in the estate). However, the loan itself is an asset of the estate and will be subject to IHT. This strategy is complex and requires careful documentation.

  5. Life insurance to cover the IHT risk. For donors who wish to gift appreciated assets but are concerned about the seven-year survival period, a term life insurance policy written in trust can provide funds to pay the IHT bill if the donor dies within seven years. The premiums are small relative to the potential IHT liability.

For cross-border estate planning involving UK assets and international beneficiaries, some families use structured payment channels to manage the timing of asset transfers and tax liabilities. For example, a globally mobile family might use an Airwallex global account to hold and move funds in multiple currencies while awaiting the resolution of IHT and CGT filings across jurisdictions.

The Impact of Changing Tax Rates and Allowances

The UK tax landscape is subject to frequent change. The CGT annual exemption has been reduced from £12,300 in 2022–23 to £3,000 in 2024–25. The IHT nil-rate band has been frozen at £325,000 since 2009 and is scheduled to remain frozen until 2028. The residence nil-rate band is also frozen at £175,000. These freezes mean that more estates are drawn into IHT as asset values rise, increasing the pressure to gift assets.

The Labour government elected in July 2024 has signalled potential changes to IHT, including the possible removal of Business Relief and Agricultural Relief, and the alignment of CGT rates with income tax rates. Any such changes would significantly alter the calculus for gifting appreciated assets.

Example: Mr E’s forward planning. Mr E, aged 68, holds a portfolio of AIM-listed shares worth £800,000 with a base cost of £200,000. He wishes to gift them to his children. Under current rules, a gift with hold-over relief would defer CGT, but the IHT risk on a £600,000 gain within seven years is substantial. Mr E decides to gift £300,000 of shares each year for three years, using his annual CGT exemption and hold-over relief for the remainder. He also takes out a seven-year decreasing term life insurance policy for £400,000 to cover the potential IHT bill. The insurance premium is £2,400 per year. This strategy spreads the risk and provides a safety net.

FAQ

Q1: If I gift an asset that has gone down in value since I bought it, do I still pay CGT?

No. A gift of an asset that has fallen in value does not trigger a CGT charge because there is no gain. However, you also cannot claim a capital loss on a gift to a connected person (such as a family member) unless the asset is sold at arm’s length. The loss is “clogged” and can only be set against gains on disposals to the same person. For IHT purposes, the gift is still a PET, and if you die within seven years, the lower death-date value is added to your estate, which may reduce the IHT charge compared to gifting an appreciated asset.

Q2: How does the seven-year survival period work for IHT on gifts?

The seven-year period runs from the date of the gift to the date of death. If the donor dies within three years, the full 40% IHT rate applies to the value of the gift (after using any available nil-rate band). Between three and seven years, taper relief reduces the IHT rate: 20% reduction in year four, 40% in year five, 60% in year six, and 80% in year seven. However, taper relief only applies to the rate, not to the value of the gift. If the donor’s estate already exceeds the nil-rate band from other assets, the gift is taxed at the full 40% regardless of taper relief, because the nil-rate band is used first against other assets.

Q3: Can I claim hold-over relief on a gift of shares in a listed company?

Generally, no. Hold-over relief under TCGA 1992, s.165 is available for gifts of business assets, which include shares in unlisted trading companies or shares in a company where the donor holds at least 5% of the voting rights and the company is a trading company. Shares in a FTSE 100 company do not qualify. For listed shares, the only way to defer CGT is to gift them to a spouse or to a trust where hold-over relief is available for certain trust settlements. The CGT charge on listed share gifts is immediate and must be paid within 60 days.

References

  • HMRC 2023, Annual Tax Statistics: Inheritance Tax and Capital Gains Tax Receipts 2021–22
  • HMRC 2024, Capital Gains Tax Annual Exemption and Rates for 2024–25
  • HMRC 2024, Inheritance Tax: Nil-Rate Band and Residence Nil-Rate Band for 2024–25
  • Office for Budget Responsibility 2024, Fiscal Risks Report: IHT Receipts Forecast to Double by 2028
  • ICAEW 2024, Tax Faculty Guidance: Hold-Over Relief and Gifts of Business Assets