Definition
Capital Gains Tax in an estate context refers to the tax treatment of asset gains when someone dies and during estate administration, where death provides a tax-free 'uplift' that eliminates CGT on historical gains.
This uplift mechanism is one of the most valuable but least understood aspects of UK tax law, potentially saving beneficiaries tens of thousands of pounds in tax on inherited property and investments.
What Does Capital Gains Tax (Estate Context) Mean?
Under the Taxation of Chargeable Gains Act 1992, Section 62, death is treated uniquely for Capital Gains Tax purposes. When someone dies, there is no disposal for CGT—their assets pass to executors at market value on the date of death. This creates what's known as the "probate uplift" or "CGT uplift," which resets the base cost (the value used to calculate future gains) to the death value. Crucially, this uplift applies even when no Inheritance Tax is payable, such as when assets pass to a spouse or fall within the nil-rate band.
The treatment of CGT operates in three distinct phases. First, at death itself, assets transfer to executors at probate value with no CGT charged—the historical gain disappears entirely. Second, during estate administration, executors may face CGT if they sell assets for more than the probate value. Executors receive a £3,000 annual exempt amount for the year of death and the two following tax years. Third, when beneficiaries receive assets, there's no CGT on the transfer itself—they inherit at probate value and only pay CGT on future gains when they eventually sell.
For example, David bought a buy-to-let property in 2000 for £120,000. When he dies in 2024, it's worth £380,000. His executors inherit it at the £380,000 probate value. The £260,000 gain during David's ownership is wiped clean by the CGT uplift—no tax is due on that historical profit. If the executors sell it for £385,000 during estate administration, they would only face CGT on the £5,000 gain since death, covered by their £3,000 annual exemption. When proceeds are distributed to beneficiaries, there's no additional CGT charge.
The uplift has significant planning implications. Assets that would trigger substantial CGT if gifted during lifetime pass tax-free on death for CGT purposes (though Inheritance Tax may apply). This creates a tension in estate planning: lifetime gifts can save IHT if you survive seven years, but you lose the CGT uplift. The same assets can face IHT but receive CGT relief—these are separate taxes with different rules. For UK residential property sold by executors, special rules apply: they must report the disposal and pay any CGT due within 60 days of completion, at 24% on gains above the £3,000 exemption.
Accurate valuation at death is essential because this becomes the base cost for future CGT calculations. When estates don't pay IHT (due to exemptions or being below the threshold), HMRC doesn't formally agree asset values during probate, which can create challenges if they later question the base cost when beneficiaries sell.
Common Questions
"Do I have to pay Capital Gains Tax when I inherit my parent's house?"
No, you won't pay any Capital Gains Tax when you inherit the property. It passes to you at its probate value, and there's no CGT charge on the transfer itself. You'll only face CGT if you later sell the house for more than the probate value, and only on the gain since you inherited it. All appreciation during your parent's ownership is tax-free due to the probate uplift.
"If my mum's house increased £200,000 since she bought it, will executors pay Capital Gains Tax on that gain?"
No, executors won't pay CGT on that £200,000 historical gain. When your mum died, the house received a "probate uplift" to its market value at death, wiping out all CGT on gains made during her lifetime. Executors would only pay CGT if they sell the house for more than the probate value. For example, if the probate value was £350,000 and they sell it for £360,000, they'd only face CGT on the £10,000 gain since death.
"Is it better to gift property to my children now or leave it in my will?"
From a Capital Gains Tax perspective, leaving property in your will is usually more tax-efficient because beneficiaries receive the probate uplift, eliminating CGT on all historical gains. If you gift property during your lifetime, you may trigger an immediate CGT liability on the gain since you bought it. However, lifetime gifts can save Inheritance Tax if you survive seven years. The best approach depends on your specific circumstances, including the asset's value, potential gains, and your IHT position.
Common Misconceptions
Myth: "When I inherit my dad's buy-to-let property, I'll have to pay Capital Gains Tax on all the profit he made since he bought it 25 years ago."
Reality: You won't pay any CGT on the gains made during your dad's ownership. The property receives a "probate uplift" to its market value at his death, which becomes your base cost for CGT purposes. When you eventually sell, you'll only pay CGT on any increase in value since you inherited it, not on the decades of growth during his ownership. This uplift can save tens of thousands of pounds in tax.
Myth: "As an executor, I can sell estate assets without worrying about Capital Gains Tax—it's only beneficiaries who pay CGT on inherited assets."
Reality: Executors can face Capital Gains Tax if they sell estate assets during administration before distributing them to beneficiaries. If you sell property, shares, or other assets for more than their probate value, the estate may owe CGT on that gain. Executors have a £3,000 annual tax-free allowance and must report property disposals within 60 days of completion. However, when you transfer assets directly to beneficiaries without selling them, there's no CGT charge on that transfer.
Related Terms
Understanding Capital Gains Tax in an estate context connects to these related concepts:
- Inheritance Tax: Complementary capital tax where IHT may be charged on the same assets that receive CGT uplift—understanding both taxes is crucial for estate planning decisions.
- Estate Administration: The process during which executors may face CGT liabilities on asset sales rather than direct transfers to beneficiaries.
- Investment Property: Common asset type that benefits significantly from CGT uplift on death, with executors following special 60-day reporting rules when selling.
- Share Portfolio: Another asset class receiving the same probate uplift as property, with quoted shares subject to special valuation rules affecting CGT base cost.
Related Articles
- Article on Estate Tax Planning: Explains how the CGT uplift fits into your overall estate planning strategy and affects decisions about lifetime gifts versus bequests.
- Understanding Inheritance Tax: Demonstrates how CGT uplift and IHT interact—the same assets may face IHT but receive CGT relief.
- Executor Responsibilities Guide: Provides practical guidance on executor CGT compliance, including the 60-day property reporting rule and annual exemption usage.
- Inheriting Property: What You Need to Know: Clarifies how the probate uplift affects beneficiaries' future CGT liabilities when they eventually dispose of inherited assets.
Need Help with Your Estate Plan?
Understanding how Capital Gains Tax and Inheritance Tax work together is essential for effective estate planning. The probate uplift can save your beneficiaries substantial tax, but only with proper planning and accurate documentation.
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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal or tax advice. Capital Gains Tax rules are complex and subject to change. For advice specific to your situation, consult a qualified tax adviser or solicitor.