Two taxes shape what your family actually receives: Inheritance Tax on what you leave behind, and Capital Gains Tax on what you sell or give away during your lifetime. They work differently and interact in ways that catch people out.
Searches for capital gains inheritance tax reflect that confusion. They are separate taxes with separate rules, but the same property can encounter both at different moments, and knowing which applies when is the foundation of sensible estate planning.
2026 matters. Thresholds have been frozen for longer, a significant reform to business and agricultural reliefs took effect in April, and a further change to pensions arrives next year.
This article covers how both taxes work, when CGT applies to a second home, what happens to property on death, and what has actually changed. Figures are for the 2026/27 tax year.
Why Estate Planning Matters in 2026
The nil rate band has stood at £325,000 since 2009 and is now frozen until 5 April 2031, following an extension announced at the Autumn 2025 Budget. The residence nil rate band of £175,000 and the £2 million taper threshold are frozen to the same date.
Property values have not stood still. The effect is fiscal drag: estates that would once have fallen below the threshold are pulled into charge without any change in the rules themselves.
Capital Gains Tax has tightened too. The annual exempt amount is £3,000 for 2026/27, down from £12,300 three years earlier, so gains that previously escaped tax now generate a liability.
Inheritance Tax vs Capital Gains Tax: What's the Difference?
Inheritance Tax is charged on the value of your estate when you die, and on certain lifetime gifts. It is a tax on transferring wealth.
Capital Gains Tax is charged on the profit when you dispose of an asset that has increased in value. It is a tax on growth, not on the asset's total worth.
Inheritance Tax | Capital Gains Tax | |
|---|---|---|
Charged on | Value of the estate transferred | Gain since acquisition |
When | On death, and some lifetime gifts | On sale, gift or other disposal |
Rate (2026/27) | 40%, or 36% where 10%+ of the net estate goes to charity | 18% basic rate, 24% higher rate |
Allowance | £325,000 nil rate band, plus up to £175,000 residence nil rate band | £3,000 annual exempt amount |
Paid by | The estate, via executors | The person making the disposal |
Main home | Included in the estate | Usually exempt under Private Residence Relief |
How Do Capital Gains and Inheritance Tax Work Together?
They aren't the same tax, and one doesn't replace the other. But they meet at specific points.
On death, there is no Capital Gains Tax. Assets are not treated as disposed of. They are rebased to market value at the date of death, and IHT is assessed on the estate. Any gain accrued during the deceased's lifetime effectively disappears for CGT purposes.
The beneficiary starts fresh, acquiring the asset at that probate value. If they later sell, their gain runs from that figure, not from what the deceased paid.
Lifetime gifts can trigger both. Give away a second home and you have made a disposal for CGT, potentially creating an immediate bill, while the gift may still fall within your estate for IHT if you die within seven years.
That combination is where people most often come unstuck: paying CGT now on a gift that fails to escape IHT later.
Capital Gains Tax on a Second Home
Your main home is normally exempt through Private Residence Relief. A second property is not, so capital gains on second home disposals are chargeable when you sell, gift or otherwise dispose of them.
For 2026/27 the rates are 18% on gains falling within your basic rate band and 24% on gains above it. These rates apply to residential property and other assets alike, following the alignment that took effect on 30 October 2024.
Calculating the gain
Start with the sale proceeds, or market value if you gifted the property
Deduct the purchase price
Deduct allowable costs: stamp duty, legal fees, survey costs, estate agent fees on sale
Deduct capital improvements such as an extension or new kitchen, but not repairs and maintenance
Deduct any Private Residence Relief that applies
Deduct the £3,000 annual exempt amount
Apply 18% or 24% depending on where the gain sits against your income
Illustrative example
These figures are for illustration only and do not reflect any individual's position.
A higher rate taxpayer bought a buy-to-let flat for £200,000 and sells it for £320,000.
Sale proceeds | £320,000 |
Less purchase price | (£200,000) |
Less buying costs (stamp duty, legal) | (£8,000) |
Less selling costs (agent, legal) | (£6,000) |
Less capital improvements | (£12,000) |
Gain | £94,000 |
Less annual exempt amount | (£3,000) |
Taxable gain | £91,000 |
CGT at 24% | £21,840 |
Note how the £26,000 of costs and improvements reduced the bill by more than £6,000. Records matter, and people routinely fail to keep them.
Where Private Residence Relief may apply
If a property was your main home for part of your ownership, relief covers that period plus the final nine months, whether or not you lived there at the end. Business use of part of the property, or grounds above a certain size, can restrict it.
Reporting deadline
Where CGT is due on a UK residential property disposal, you must report and pay within 60 days of completion using HMRC's UK property reporting service. This is separate from Self Assessment, though the same gain also goes in your annual return, and missing it triggers penalties.
If no tax is due, because the gain is covered by Private Residence Relief or falls within the annual exempt amount, no 60-day return is needed.
What Happens to Property When Someone Dies?
There is no Capital Gains Tax charge on death. This is one of the more valuable features of the system, and often misunderstood.
The property is valued at the date of death, that value forms part of the estate for IHT, and the beneficiary acquires it at the same value.
Illustrative example. A parent bought a house for £90,000 in 1995. It is worth £450,000 when they die. No CGT arises on the £360,000 gain. The £450,000 counts towards the estate for IHT, and the beneficiary's base cost becomes £450,000.
If that beneficiary sells for £470,000 two years later, their gain is £20,000, not £380,000. Selling quickly at close to probate value may produce little or no gain at all.
Executors should note the estate has a limited annual exempt amount for disposals during administration, and different considerations apply where the estate sells a property rather than transferring it to beneficiaries first.
Gifting Property and Other Assets
Gifting is the most common lifetime planning step, and the one with the most traps.
For Inheritance Tax, most gifts to individuals are potentially exempt transfers. Survive seven years and they fall outside your estate. Die within seven years and they count, though taper relief reduces the tax on gifts made between three and seven years before death.
For Capital Gains Tax, a gift is a disposal at market value. Give your daughter a rental flat and you are treated as having sold it at full value, even though no money changed hands, and the CGT is payable from your own funds.
Transfers between spouses and civil partners are different, taking place on a no gain, no loss basis, so no CGT arises and they are exempt from IHT.
A significant trap: gifts with reservation of benefit. Give away your home but continue living in it rent-free and it generally stays in your estate for IHT regardless of the seven-year rule, while you may also have triggered CGT on the gift. That is why gifting the family home while still occupying it is rarely the simple solution it appears.
2026 Changes That Could Affect Estate Planning
Now in force
The threshold freeze, extended. The nil rate band, residence nil rate band and £2 million taper threshold are frozen until 5 April 2031, following the Autumn 2025 Budget.
Agricultural and Business Property Relief reform. From 6 April 2026, 100% relief is capped at a combined £2.5 million per person of qualifying agricultural and business property, with 50% relief above that — an effective 20% rate on the excess.
This figure has changed twice and is widely misreported. The reform announced at Autumn Budget 2024 proposed a £1 million allowance. On 23 December 2025 the government announced it would instead be £2.5 million, and this was legislated in Finance Act 2026. Any guidance still quoting £1 million is out of date.
The allowance is transferable between spouses and civil partners, refreshes every seven years for lifetime gifts, and AIM-listed shares now attract 50% relief without consuming the allowance. Qualifying business and agricultural assets inherited from 6 April 2026 can have the tax paid over ten interest-free annual instalments.
Business Asset Disposal Relief rose to 18% for disposals on or after 6 April 2026, up from 14% in 2025/26.
Announced, not yet in effect
Pensions within the estate from 6 April 2027. Most unused defined contribution pension funds and certain death benefits will be brought into the estate for IHT. Pensions have been an efficient way to pass on wealth, and this reverses that, so anyone whose planning assumes pensions sit outside the estate should review it before April 2027.
Tax rules change, so confirm current thresholds and reliefs on GOV.UK or with a professional adviser before acting.
How Can You Protect Your Estate?
Review your will. The residence nil rate band requires a qualifying home to pass to direct descendants. Getting that wrong can cost a couple up to £350,000 of allowance.
Understand how property is owned. Joint tenants and tenants in common are treated differently on death, and it affects what you can plan for.
Keep records. Purchase prices, legal fees, stamp duty and capital improvement costs all reduce a future CGT bill. Reconstructing them twenty years later is difficult and often impossible.
Watch the £2 million taper. The residence nil rate band reduces by £1 for every £2 above £2 million, disappearing entirely at £2.35 million for a single estate. Planning around that threshold can be worth more than it first appears.
Consider the charitable rate. Leaving 10% or more of the net estate to charity reduces the Inheritance Tax rate on the remainder from 40% to 36%.
Use both spouses' allowances. Each person has their own nil rate bands and their own £3,000 annual exempt amount, and the CGT allowance cannot be transferred or carried forward.
Review gifts already made. The seven-year clock matters, and records of dates and values are essential for executors.
Revisit plans after tax changes. The April 2026 reliefs reform and the April 2027 pensions change both warrant a review.
Take advice. Circumstances differ enormously, and the interaction between the two taxes is where mistakes get expensive.
Common Questions About Capital Gains Tax and Inheritance Tax
Do you pay Capital Gains Tax and Inheritance Tax on the same property? Not at the same moment. There is no CGT on death; the property is rebased to market value and IHT is assessed on the estate. Both can arise on a lifetime gift, where CGT may be due immediately and IHT may still apply if you die within seven years.
Is Capital Gains Tax payable when you inherit a property? No. You acquire it at its market value at the date of death. CGT only becomes relevant if you later sell it for more than that value.
Do I pay Capital Gains Tax when selling a second home? Usually yes, since Private Residence Relief normally applies only to your main home. For 2026/27 the rates are 18% or 24% depending on your income, after deducting allowable costs and the £3,000 annual exempt amount.
How is Capital Gains Tax calculated on a second home? Sale proceeds less purchase price, less buying and selling costs, less capital improvements, less any Private Residence Relief, less the annual exempt amount. The remainder is taxed at 18% or 24%.
Does Inheritance Tax apply to a second home? Yes. It forms part of your estate at its market value. The residence nil rate band applies only to a property you have lived in as a residence and which passes to direct descendants, so a buy-to-let will not usually qualify.
What happens to Capital Gains Tax when someone dies? Nothing is charged. Gains accrued during the deceased's lifetime are not taxed, and assets are rebased to their date-of-death value for the beneficiary.
Can gifting a property trigger Capital Gains Tax? Yes. A gift is a disposal at market value for CGT, so tax can arise even though you received nothing. Gifts between spouses and civil partners are the exception.
Does the value of an inherited property affect future Capital Gains Tax? Very much so. The probate value becomes the beneficiary's base cost, so an accurate valuation at the time of death matters for any later sale.
How can I reduce the tax burden on my estate legally? Through recognised reliefs and allowances: making full use of both spouses' nil rate bands, ensuring the residence nil rate band conditions are met, lifetime gifting with the seven-year rule in mind, charitable legacies, and keeping proper records. Outcomes depend on individual circumstances.
Should I speak to a tax adviser about estate planning? For anything beyond a straightforward estate, yes. Property, business assets, second homes and the April 2027 pensions change all add complexity, and errors are usually more expensive than advice.
A Final Word
Inheritance Tax and Capital Gains Tax pull in different directions. Holding an asset until death removes the capital gain but keeps its full value in your estate. Gifting during your lifetime may remove it from the estate after seven years but can trigger a CGT charge straight away. There is no universal answer, only a calculation specific to your assets, age, health and family.
What has genuinely changed for 2026 is worth knowing accurately: thresholds frozen until 2031, the agricultural and business relief cap at £2.5 million rather than the widely reported £1 million, and pensions entering the estate from April 2027.
This article is general information, not personal tax advice. Circumstances vary considerably and the rules described can change. Before making significant decisions about property, gifts or your estate, take advice from a qualified tax adviser or solicitor and check current guidance on GOV.UK.
