When most people think about Capital Gains Tax (CGT), they think of selling a property or disposing of shares. But CGT can also arise through less obvious channels—like when assets are passed down through trusts or inheritance. These situations often come with emotional decisions, legal processes, and tax complexities. Understanding the implications of CGT on inheritance and trusts is crucial for anyone looking to preserve family wealth and comply with HMRC rules.
At Capital Gains Tax Expert, we help individuals, trustees, and beneficiaries manage CGT liabilities arising from estates and trust structures. By planning correctly, you can avoid unexpected tax bills and ensure your assets are protected for future generations.
⚖️ Why Capital Gains Tax Is Relevant to Inheritance and Trusts
Many people assume that inheritance is only subject to Inheritance Tax (IHT). While IHT does apply at the time of death, CGT becomes relevant when inherited assets are sold, transferred, or held within trusts. The rules surrounding these disposals can be highly technical, and small mistakes can result in significant tax exposure.
Whether you’re:
- An executor administering an estate
- A trustee overseeing family assets
- A beneficiary who’s received a property, portfolio, or business interest
- you need to understand how CGT is triggered and how to legally minimise the impact.
🧾 How CGT Works on Inherited Assets
When someone passes away, the value of their assets is determined at the date of death. This value becomes the base cost for any future CGT calculation.
Let’s break it down:
- If you inherit a property that was bought for £100,000 in 1980 but is worth £500,000 at the time of death in 2025, that £500,000 becomes your base cost.
- If you later sell the property for £550,000, you only pay CGT on the £50,000 gain—not the full increase from the original purchase.
This is known as the probate value step-up, and it often works in favour of beneficiaries by wiping out any gains during the deceased’s lifetime.
🏠 Private Residence Relief and Inherited Property
If the inherited property was the deceased’s main residence, the estate may be eligible for Private Residence Relief (PRR) for the time they lived there. However, the relief does not extend to the beneficiary unless they also occupy the property as their main home.
So, if you inherit a home and plan to sell it without ever living in it, PRR won’t apply to your gain. But if you move in and make it your primary residence before selling, you could reduce the CGT payable.
Planning tip: If the timing works, living in the inherited property for even a short time before disposal can open the door to partial PRR.
🧬 Capital Gains Tax on Trusts
Trusts are a common way to manage family wealth, especially when assets are being passed down over time or held for minor beneficiaries. However, CGT treatment for trusts differs significantly from individuals:
- Trusts have a lower CGT exemption, currently only £1,500 per year.
- Most gains within trusts are taxed at a higher flat rate—typically 20% on general assets and 24% on residential property.
- CGT may apply when assets are sold, when the trust ends, or when assets are distributed to beneficiaries.
There are several types of trusts, and CGT rules vary depending on the structure.
📘 Discretionary Trusts
In a discretionary trust, the trustee controls when and how beneficiaries receive assets. The trust pays CGT when it sells or disposes of an asset, and the higher trust tax rates apply.
Because beneficiaries do not have an automatic right to the assets, they cannot use their personal CGT allowance unless the asset is distributed to them directly.
📗 Bare Trusts
A bare trust is simpler. The beneficiary is treated as owning the asset from the start, even though a trustee manages it. In this case, CGT is calculated using the beneficiary’s tax rates and allowance.
This often results in lower CGT liabilities, especially for younger beneficiaries or those in lower income tax bands.
📙 Interest in Possession Trusts
These trusts allow a named beneficiary to receive income from trust assets (like rental income), but not the asset itself. CGT becomes due if the asset is sold during the trust’s life or transferred to a different beneficiary.
📤 Transferring Assets Out of a Trust
When assets are distributed out of a trust, CGT can apply if the asset has appreciated in value since it entered the trust. However, in some situations, “holdover relief” is available—allowing the gain to be deferred and passed on to the beneficiary instead.
This is a powerful tool, especially for assets like:
- Shares in a family company
- Farmland or agricultural assets
- Property held long-term
Holdover relief must be properly claimed and documented with HMRC, and specific rules apply depending on the type of trust and asset.
📉 Reducing CGT Through Effective Estate Planning
While CGT is generally not charged at the moment of death, careful estate planning can reduce future CGT for beneficiaries. Here are some strategies we use:
✅ Gifting Assets Strategically Before Death
In some cases, gifting assets to a spouse or trust before death may reset the base cost or trigger reliefs that wouldn’t apply post-mortem.
✅ Claiming Inherited Losses
If an estate sells an asset at a loss, this can be used to reduce CGT on other estate disposals, or even passed on to the beneficiaries in some situations.
✅ Splitting Asset Sales Across Tax Years
Timing the sale of inherited assets can help beneficiaries use multiple annual exemptions, reducing total CGT due.
✅ Making Use of Spouse and Civil Partner Transfers
Transferring inherited assets between spouses is tax-free and allows both partners to use their allowances and lower tax bands.
💼 When Executors and Trustees Need Expert Help
Executors and trustees carry a heavy legal responsibility when managing estates or trusts, especially when it comes to taxes. Failing to report or miscalculating CGT can result in penalties or interest from HMRC—not to mention additional tax burdens on the beneficiaries.
At Capital Gains Tax Expert, we offer full-service support for:
- Executors handling CGT on estate disposals
- Trustees managing multi-generational wealth
- Beneficiaries unsure how to plan asset sales or distributions
- Families using trusts as part of inheritance planning
From calculating gains to filing returns and claiming reliefs, we ensure full compliance while helping you save on tax wherever legally possible.
🔚 Final Thoughts: Protecting Generational Wealth Starts with CGT Awareness
Trusts and inheritance planning aren’t just about Wills—they’re about protecting value and minimising unnecessary tax. Understanding how CGT applies to inherited assets or trust structures is vital if you want to preserve family wealth for the long term.
Whether you’re creating a trust, acting as an executor, or inheriting a property, you should seek professional advice before making any decisions that could trigger tax.
The rules are complex—but with proper planning, the tax burden doesn’t have to be.
For clear, expert guidance tailored to your situation, visit Capital Gains Tax Expert. We’re here to help you navigate trust and inheritance tax with confidence.
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