This article provides a comprehensive gateway to the UK’s capital and wealth tax regime. It explains the main taxes levied on capital transactions and accumulated wealth, with a particular focus on Capital Gains Tax (CGT) and Inheritance Tax (IHT). Both taxes are of central importance to individuals, families, and business owners, affecting lifetime asset transfers, succession planning, and the overall management of wealth.
What this article is about
This guide sets out the purpose and structure of capital and wealth taxation in the UK. It introduces the key principles of CGT and IHT, explains how these taxes apply in practice, and considers their interaction in estate planning and business succession. For readers who want deeper insight into specific tax regimes, we provide a structured overview here and signpost to dedicated, detailed guides on CGT and IHT in the Useful Links section.
By the end, you will have a clear understanding of:
- The scope of UK capital and wealth taxes and who they affect
- How CGT applies to disposals of assets such as property and shares
- How IHT applies to transfers of wealth on death or during lifetime
- The interaction between these two taxes and how planning can reduce liabilities
Section A: Understanding Capital and Wealth Taxes
Capital and wealth taxes are distinct from income and consumption taxes. Rather than targeting earnings or spending, they focus on gains in value, accumulated assets, or transfers of wealth. In the UK, the two main taxes in this category are Capital Gains Tax (CGT), charged on gains realised from disposals of certain assets, and Inheritance Tax (IHT), charged on the transfer of wealth on death or on some lifetime transfers.
1. What are Capital and Wealth Taxes?
Capital and wealth taxes are designed to capture a portion of the value of assets that have appreciated over time, or of wealth transferred from one individual to another. Unlike income tax, which is linked to employment and trading profits, these taxes apply to asset disposals and transfers.
CGT applies where a taxpayer disposes of an asset that has increased in value since acquisition. The tax is charged only on the gain, not on the full sale proceeds. IHT, on the other hand, is not linked to asset disposals but to the value of an estate when someone dies, or to certain transfers made during their lifetime.
Both regimes play a role in shaping how individuals and businesses manage assets, plan for retirement, and structure estates.
2. Policy Context
Capital and wealth taxes serve dual purposes: revenue generation and redistribution. They provide HMRC with significant revenue while also acting as a mechanism to reduce intergenerational wealth concentration.
The government uses CGT to ensure that gains realised outside of income streams contribute fairly to public finances. Similarly, IHT ensures that a portion of large estates is redistributed through taxation, although thresholds and reliefs aim to protect smaller estates and family businesses.
For businesses, these taxes influence decisions around structuring, investment, and succession. For individuals, they shape long-term planning, particularly in relation to property, investments, and family wealth.
3. Who Pays Capital and Wealth Taxes?
The scope of these taxes is broad. UK residents, trusts, and estates are generally within charge, though non-UK residents may also be liable depending on asset location and tax treaty provisions.
- Individuals – liable on personal asset disposals (CGT) and estate transfers (IHT).
- Trusts – often used for estate planning but subject to their own CGT and IHT rules.
- Business owners – impacted by both CGT on business sales and IHT on passing down business assets.
Section Summary
Capital and wealth taxes differ from income and consumption taxes by targeting asset growth and wealth transfers. CGT and IHT are the key regimes in the UK, raising revenue while influencing financial and succession planning. Understanding who is liable and the policy aims behind these taxes provides the foundation for considering each in detail.
Section B: Capital Gains Tax (CGT)
Capital Gains Tax (CGT) is one of the UK’s principal capital taxes. It applies when a person disposes of an asset that has increased in value, taxing the gain rather than the total disposal proceeds. While it is primarily an individual tax, it also applies to trustees and personal representatives of estates. For businesses and company shareholders, CGT can be a significant consideration in restructuring, succession planning, and investment strategy.
1. Overview of CGT
CGT arises on the disposal of chargeable assets. Disposals include sales, gifts, exchanges, or compensation received for the loss of an asset. The tax is levied on the difference between the disposal proceeds (or market value, in certain cases) and the acquisition cost, adjusted for allowable expenses and reliefs.
Chargeable assets typically include:
- Property that is not a person’s main residence
- Shares, investments, and securities
- Business assets, including goodwill
- Valuable personal possessions (chattels) worth more than £6,000
Some assets are exempt, such as cars, ISAs, and certain UK government gilts.
2. CGT Rates and Allowances
Each tax year, individuals benefit from an Annual Exempt Amount (AEA), which shelters a portion of gains from tax. For the 2025/26 tax year, the AEA is £3,000.
Rates of CGT depend on the taxpayer’s income tax band:
- Basic rate taxpayers: 10% on most assets, 18% on residential property gains
- Higher and additional rate taxpayers: 20% on most assets, 24% on residential property gains
Trusts and estates are generally charged at 20% (or 24% for residential property).
Reliefs play a major role in CGT planning. Key reliefs include:
- Private Residence Relief – exempts the main home in most circumstances
- Business Asset Disposal Relief (BADR) – reduces the rate to 10% on qualifying business disposals, subject to a £1 million lifetime limit
- Rollover Relief – allows gains on business assets to be deferred when reinvested in qualifying assets
- Gift Hold-Over Relief – allows certain lifetime transfers to be taxed on the recipient rather than the donor
3. Business Relevance
CGT is highly relevant to business owners and entrepreneurs. It applies when selling or transferring a business, restructuring ownership, or passing down shares to the next generation. Reliefs such as BADR and Hold-Over Relief are critical in ensuring tax efficiency in these scenarios.
For companies, CGT does not apply directly; instead, companies pay Corporation Tax on chargeable gains. However, shareholders and directors will still face CGT personally when disposing of shares or receiving assets.
In addition, the timing of disposals can materially affect tax liabilities, as gains are assessed within the tax year. Careful structuring and advance planning can reduce exposure and maximise reliefs.
Section Summary
CGT applies to the disposal of a wide range of assets, taxing the net gain realised. With varying rates, exemptions, and reliefs, its impact depends heavily on the taxpayer’s income band and the nature of the asset. For business owners, CGT is a critical factor in transactions and succession planning, making professional advice essential to optimise outcomes.
You can read our extensive guide to Capital Gains Tax here >>
Section C: Inheritance Tax (IHT)
Inheritance Tax (IHT) is the UK’s principal tax on wealth transfers, most often arising on death but also applying to certain lifetime transfers. It is levied on the value of an estate or on gifts made during a person’s lifetime that fall within scope. For families and business owners, IHT is one of the most important considerations in succession and estate planning, as liabilities can be substantial without appropriate structuring.
1. Overview of IHT
IHT is charged on the value of an individual’s estate at the date of death. This includes all property, investments, business interests, and possessions, less debts and liabilities. In addition, certain gifts made within seven years before death may also be brought into charge.
The person responsible for paying IHT is usually the executor or personal representative of the estate, although liability can also fall on beneficiaries in some cases (for example, with certain lifetime gifts).
Many transfers during a person’s lifetime are exempt from IHT altogether, such as gifts to a spouse or civil partner, gifts to charity, or smaller annual gifts that fall within the HMRC exemptions.
2. Rates, Thresholds and Reliefs
The standard IHT rate is 40% on the value of an estate above the available thresholds. The main threshold is the Nil Rate Band (NRB), which stands at £325,000 and has been frozen for several years.
Additional allowances and reliefs include:
- Residence Nil Rate Band (RNRB) – up to £175,000 available where a main residence passes to direct descendants, subject to tapering for estates over £2 million
- Spouse or Civil Partner Exemption – transfers between spouses or civil partners are generally free of IHT
- Business Property Relief (BPR) – up to 100% relief on qualifying business assets, ensuring family businesses can be passed on without prohibitive tax charges
- Agricultural Property Relief (APR) – similar protection for qualifying farmland and agricultural property
Reduced rates are available in certain circumstances, for example where 10% or more of an estate is left to charity, reducing the rate from 40% to 36%.
3. Planning Considerations
IHT planning is a central aspect of long-term wealth management. Families often use a combination of lifetime gifting, trusts, and reliefs to mitigate potential liabilities.
Key considerations include:
- Making use of annual exemptions (£3,000 allowance) and the small gifts exemption (£250 per recipient)
- Using Potentially Exempt Transfers (PETs) – gifts to individuals that become exempt if the donor survives seven years, with taper relief reducing tax due if death occurs between three and seven years after the gift
- Structuring wills and estate plans to maximise reliefs such as NRB and RNRB
- Preserving BPR and APR by ensuring business and agricultural assets qualify under HMRC rules
- Considering insurance policies to cover potential IHT liabilities
For business owners, advance succession planning is essential. Without it, heirs may face liquidity issues where tax liabilities exceed available cash, potentially forcing the sale of assets.
Section Summary
IHT applies to estates and certain lifetime transfers, with a standard 40% rate above the Nil Rate Band. While potentially onerous, a wide range of exemptions and reliefs exist, especially for spouses, business assets, and family homes. Proactive planning is vital to minimise exposure and ensure wealth is preserved across generations.
You can read our extensive guide to Inheritance Tax here >>
Section D: Interaction Between CGT and IHT
Capital Gains Tax (CGT) and Inheritance Tax (IHT) are often considered separately, but in practice, they interact in important ways. Together, they shape how wealth is transferred during life and on death. Understanding their overlap is vital for individuals, families, and businesses looking to structure transactions efficiently and avoid unnecessary double taxation.
1. Overlaps and Distinctions
CGT applies on the disposal of assets during a person’s lifetime, whereas IHT generally applies on transfers made on death. This distinction means that a lifetime transfer could trigger CGT but not IHT, while a death transfer could create an IHT charge but escape CGT.
For example, if a parent gifts an investment property to a child during their lifetime, the gain on that property since acquisition may be subject to CGT at the time of the gift. However, if the same property is transferred through inheritance, no CGT is charged at death, although the estate may face IHT.
2. Double Charges and Reliefs
There are circumstances where both CGT and IHT could potentially apply. However, UK tax law provides reliefs to prevent unfair double taxation.
For instance:
- Lifetime Gifts: If a lifetime gift is chargeable to IHT (such as a chargeable lifetime transfer into trust), Gift Hold-Over Relief may defer CGT by passing the gain to the recipient.
- On Death: On death, IHT is charged on the estate, but no CGT arises because the deceased’s assets are rebased to market value. This “CGT uplift” ensures heirs do not inherit latent capital gains. Importantly, the uplift applies even if no IHT is payable, for example where transfers are exempt between spouses.
- Trusts: When assets are transferred into or out of trusts, both CGT and IHT issues can arise, but reliefs such as Hold-Over Relief and certain trust exemptions can mitigate exposure.
3. Strategic Planning
Balancing CGT and IHT considerations is central to tax-efficient estate and succession planning. Common strategies include:
- Timing of Transfers: Choosing between lifetime gifts and inheritance depending on asset values, gain levels, and availability of exemptions.
- Use of Reliefs: Leveraging BPR and APR to shelter business and agricultural assets from IHT, while using Hold-Over Relief to defer CGT on lifetime transfers.
- Asset Selection: Prioritising which assets to gift during lifetime (often those with smaller gains) and which to retain until death to benefit from the CGT uplift.
- Trust Planning: Using trusts carefully to balance family control, succession goals, and the availability of tax reliefs.
These strategies require careful legal and financial planning, as poorly structured transfers can lead to unnecessary tax charges.
Section Summary
CGT and IHT operate differently but are closely linked in practice. The law prevents double taxation through mechanisms such as the CGT uplift on death and Hold-Over Relief on gifts. Effective planning requires a balance of the two regimes, ensuring asset transfers are timed and structured to minimise exposure across both taxes.
FAQs
What is the difference between Capital Gains Tax and Inheritance Tax?
Capital Gains Tax (CGT) is charged on gains made when disposing of assets during a person’s lifetime, such as selling property or shares. Inheritance Tax (IHT) is charged on the value of an estate at death, or on certain transfers made during life. CGT taxes growth in asset value, while IHT taxes the transfer of wealth.
Do UK residents pay a wealth tax?
The UK does not currently have a general wealth tax. Instead, HMRC relies on targeted capital and wealth taxes such as CGT and IHT to raise revenue from assets and wealth transfers.
How can businesses minimise exposure to CGT and IHT?
Business owners often rely on reliefs such as Business Asset Disposal Relief for CGT and Business Property Relief for IHT. Structuring sales, succession plans, and transfers to maximise reliefs can significantly reduce liabilities. Professional planning is essential to ensure assets qualify and timing is optimised.
Are there exemptions for gifts between family members?
Yes. Gifts to spouses or civil partners are generally exempt from both CGT and IHT. Other family gifts may qualify for IHT exemptions, including the annual £3,000 allowance, the £250 small gifts exemption per recipient, and the seven-year rule for larger gifts. However, they can still trigger CGT if the asset has increased in value.
Do all estates pay Inheritance Tax?
No. Only estates valued above the Nil Rate Band (£325,000) and, where relevant, the Residence Nil Rate Band (£175,000) face IHT. Many estates fall below these thresholds or are reduced by exemptions and reliefs.
Conclusion
Capital and wealth taxes in the UK primarily take the form of Capital Gains Tax (CGT) and Inheritance Tax (IHT). Both regimes are complex, with detailed rules, rates, exemptions, and reliefs. They play a crucial role in shaping how individuals and businesses manage assets, plan for succession, and transfer wealth across generations.
For individuals, CGT is most often encountered when disposing of property, shares, or investments, while IHT becomes relevant in estate planning and wealth transfers on death. For business owners, these taxes intersect at critical moments such as company sales, restructuring, and passing assets to the next generation.
Importantly, CGT and IHT do not operate in isolation. Their interaction – for example, the CGT uplift on death or the use of Hold-Over Relief on lifetime gifts – demonstrates the need for joined-up planning. Without careful consideration, liabilities can be unnecessarily high, but with appropriate structuring, reliefs and exemptions can mitigate exposure substantially.
Businesses, families, and individuals should treat these taxes not simply as compliance requirements but as integral elements of broader financial and succession strategies. Professional advice and forward planning are key to achieving efficient outcomes while meeting obligations to HMRC.
Glossary
| Term | Definition |
|---|---|
| Capital Gains Tax (CGT) | A tax on the profit made when disposing of assets such as property, shares, or business assets. Charged only on the gain, not the full value. |
| Inheritance Tax (IHT) | A tax on the value of an estate on death, and on certain lifetime transfers of wealth. Typically charged at 40% above available thresholds. |
| Nil Rate Band (NRB) | The portion of an estate (£325,000) that is not subject to IHT. Can be transferred between spouses and civil partners. |
| Residence Nil Rate Band (RNRB) | An additional IHT allowance of up to £175,000 when a main residence passes to direct descendants. |
| Business Asset Disposal Relief (BADR) | A relief reducing the rate of CGT to 10% on qualifying business disposals, subject to a £1 million lifetime cap. |
| Business Property Relief (BPR) | Relief of up to 100% from IHT on qualifying business assets, designed to protect family businesses from large tax bills. |
| Agricultural Property Relief (APR) | Relief from IHT on the agricultural value of qualifying farmland and buildings. |
| Hold-Over Relief | A CGT relief allowing gains on certain lifetime transfers, such as into trusts, to be deferred until the recipient disposes of the asset. |
| CGT Uplift on Death | A rule that resets the acquisition value of inherited assets to their market value at the date of death, eliminating lifetime gains for CGT purposes. The uplift applies even where IHT is not payable. |
| Potentially Exempt Transfer (PET) | A lifetime gift to an individual that is exempt from IHT if the donor survives seven years. If death occurs within seven years, tax may be payable, with taper relief reducing liability after three years. |
Useful Links
| Resource | Link |
|---|---|
| GOV.UK – Capital Gains Tax | View resource |
| GOV.UK – Inheritance Tax | View resource |
| Taxoo – Capital Gains Tax Guide | View guide |
| Taxoo – Inheritance Tax Guide | View guide |
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
