The recent Autumn Budget introduced no changes to the main inheritance tax (IHT) rate. However, it was announced that from 6 April 2026, agricultural and business assets valued above £1 million will no longer qualify for full IHT relief. Instead, these assets will receive only 50% relief, resulting in an effective IHT rate of 20%.
These changes mean that more estates will be subject to IHT, prompting concerns among affected individuals. However, there are strategic measures that can be implemented to mitigate the impact.
Additionally, new capital gains tax (CGT) rates are now in effect. For disposals made on or before 29 October 2024, higher-rate taxpayers and trustees faced a CGT rate of 24% on gains from the sale of residential property and 20% on other chargeable assets. From 30 October 2024, all gains realised by higher-rate taxpayers or trustees will be taxed at 24%. Lower-rate taxpayers will now be subject to an 18% CGT rate on all gains, whereas previously, they paid 18% on residential property sales and 10% on other chargeable assets.
This article explores the relationship between IHT and CGT and outlines strategies to facilitate tax-efficient wealth transfer during an individual's lifetime.
Lifetime Gifting
A lifetime gift refers to any cash or asset given by an individual during their lifetime. A gift includes anything of value, including the difference in value if an asset is intentionally sold below market price. Lifetime gifting can be an effective strategy to reduce an individual's estate and, consequently, their IHT liability upon death. Some gifts immediately fall outside an individual's taxable estate due to specific exemptions, including:
- Spousal Exemption: Unlimited gifts to a UK-domiciled spouse or civil partner are exempt from IHT.
- Charitable Exemption: Gifts made to registered UK charities are free from IHT.
- Small Gifts Exemption: Gifts of up to £250 can be given to an unlimited number of individuals, provided no other gifts are made to them in the same tax year.
- Wedding & Civil Partnership Gifts: Parents can gift up to £5,000, grandparents up to £2,500, and others up to £1,000 without IHT implications.
- Annual Exemption: Up to £3,000 can be gifted each tax year free of IHT. If unused, this exemption can be carried forward for one year.
- Normal Expenditure Out of Income: If it can be demonstrated that gifts are made from surplus income without impacting the donor's standard of living, they may be fully exempt from IHT (e.g., contributing to a child's rent).
Gifts not covered by these exemptions are classified as "potentially exempt transfers." Provided the donor survives for seven years after making the gift, it falls entirely outside their estate. If the donor passes away within seven years and the total value of gifts made in that period exceeds the £325,000 IHT-free threshold, a tapered IHT rate applies.
It is important to note that if an individual gifts an asset but continues to benefit from it (e.g., gifting a car but still driving it regularly), it remains within their taxable estate for IHT purposes.
Additionally, the gifting of chargeable assets such as property or valuable artwork is deemed a disposal for CGT purposes. For instance, gifting a rental property to children would trigger a CGT liability, calculated based on market value.
Strategies to mitigate CGT liability on gifted assets include:
- Gift Hold-Over Relief: If applicable, this relief defers CGT payment to the recipient, who pays tax upon disposal.
- Utilising Clogged Losses: If a previously gifted asset resulted in a loss, a subsequent asset gifted to the same individual may allow the loss to be offset against the gain.
- Using a Trust: Transferring assets into a trust can shelter future capital growth from immediate CGT liability.
Using Trusts
Lifetime gifts, whether directly to individuals or into trusts, may still be subject to IHT if the donor passes away within seven years. As a precaution, individuals may consider taking out a life assurance policy to cover any potential IHT liability.
Life assurance can provide a tax-free lump sum, ensuring that funds are available to settle IHT obligations, which must be paid within six months following the end of the month in which the individual passes away. This can be particularly beneficial if assets require liquidation to cover tax liabilities.
A fixed-term life assurance policy (e.g., for 10 years) can offer financial flexibility for estate planning. Alternatively, whole-of-life policies provide indefinite coverage, making them a suitable option for mitigating ongoing IHT exposure.
How We Can Help
If you have any questions about lifetime gifting, trusts, or tax planning, our specialist tax team is here to assist. Please reach out to a member of our team or contact your usual VPC advisor. Our associated partners can also provide guidance on safeguarding your family's financial future.
This information is correct at the time of publication but may be subject to change. This article is intended for general informational purposes and does not constitute financial advice. Professional guidance should be sought before making any financial decisions based on this content.
