Taxation (UK) · The liabilities arising on chargeable lifetime transfers and on the death of an individual

Interaction of IHT with Capital Gains Tax and ISAs

Updated 11 October 2026 · Fact-checked

A lifetime gift of a chargeable asset is a disposal for CGT at market value. For IHT, a CLT is chargeable immediately, while a PET becomes chargeable only if the donor dies within seven years. On death, IHT applies to the estate but there is no CGT, and heirs take the asset at market value.

Understand Interaction of IHT with Capital Gains Tax and ISAs

Inheritance tax (IHT) and capital gains tax (CGT) are separate taxes. They can both apply to the same gift. Your job in the exam is to apply each tax on its own rules and then see how they overlap.

Lifetime gifts. A gift of a chargeable asset is a disposal for CGT. It is treated as made at market value, even though no money is received. The donor may have a gain. For IHT, the same gift is either a potentially exempt transfer (PET) if made to an individual, or a chargeable lifetime transfer (CLT) if made to a trust. A PET only becomes chargeable if the donor dies within seven years. A CLT is taxed at once above the available nil rate band.

Death. Death is not a disposal for CGT. No gain is charged on assets held at death. The person who inherits takes the asset at its market value at the date of death. This is called the uplift. Any gain built up before death is wiped out. But the assets are in the death estate for IHT, taxed at 40% above the available nil rate band.

Relief on gifts. Gift holdover relief is not a general relief for all gifts. It is available only on a gift of a business asset, or on a gift that is immediately chargeable to IHT (a CLT). A gift of a non-business asset to an individual is a PET, so holdover is not available. Where it applies, the donor and donee jointly elect. For a pure gift, the whole gain is held over. The donee takes the asset at market value less the held-over gain, so the gain is deferred, not removed. If the donee pays something for the asset (a part-gift), the proceeds in excess of cost are chargeable at once and only the rest of the gain is held over.

Business asset disposal relief (BADR) is a different relief. It applies to qualifying disposals and taxes gains at 14%, up to a lifetime limit of £1,000,000. It is not an IHT relief.

ISAs. An ISA is free of income tax and CGT while the holder is alive. It is not free of IHT. The ISA wrapper ceases on death, and the value of the ISA at death is part of the estate and is taxed like any other asset. The overall investment limit is £20,000 a year. The tax advantage is only on income and gains, not on IHT.

Key rules to remember

CGT on a gift: Gain = market value at date of gift − cost − allowable costs; A gift is a disposal at market value. Then deduct the annual exempt amount of £3,000 and any reliefs.
Gift holdover relief: Pure gift: held-over gain = whole gain. Part-gift: held-over gain = gain − chargeable excess, where chargeable excess = proceeds received − cost (if positive, and not more than the gain). Donee base cost = market value − held-over gain; Available only for gifts of business assets, or gifts that are immediately chargeable to IHT. Donor and donee must jointly elect. The donor's CGT on the held-over gain is nil. Any chargeable excess is taxed on the donor in the normal way.
Death and CGT: No CGT on death; beneficiary's base cost = market value at date of death; The uplift removes the gain. Unused capital losses cannot be passed to beneficiaries, but losses arising in the year of death can be carried back against gains of the previous three years.
CGT rates: Lower rate 18%; higher rate 24%; BADR and investors' relief 14%; The annual exempt amount is £3,000. The lifetime limit for BADR is £1,000,000. Use the rates in the exam tax tables.
IHT rates: Nil rate band £325,000; residence nil rate band £175,000; lifetime rate 20%; death rate 40%; Lifetime tax applies to CLTs above the nil rate band. Death tax applies to the estate and to PETs and CLTs within seven years of death.
Taper relief: Reduction in tax: more than 3 but less than 4 years 20%; more than 4 but less than 5 years 40%; more than 5 but less than 6 years 60%; more than 6 but less than 7 years 80%; There is no relief if death is within three years of the gift. It reduces the tax on a gift, not the value of the gift. It helps only where tax is payable on that gift. That depends on the nil rate band left after earlier chargeable transfers in the seven years before the gift.
ISA and IHT: ISA value at death is part of the death estate; The ISA wrapper gives no IHT exemption, and it ceases on death.

How to solve Interaction of IHT with Capital Gains Tax and ISAs questions

Use this method when a question mixes a gift or death with CGT, IHT or ISAs. Do CGT first, then IHT, and keep the two apart.

1Identify the event: lifetime gift (to an individual or to a trust) or death.
2For a lifetime gift of a chargeable asset, compute the CGT gain using market value as proceeds. Check if the asset is exempt, such as cash or an ISA.
3Check reliefs for the gain: gift holdover relief (business asset or CLT), then BADR if the conditions are met. Say whether the donor and donee must elect.
4Deduct the annual exempt amount of £3,000 if it has not been used, then apply 18% or 24% (or 14% for BADR).
5Classify the gift for IHT: PET or CLT. Apply exemptions first, then the nil rate band, then the 20% lifetime rate or the 40% death rate.
6If death is within seven years, apply taper relief to the tax on the gift. Then add the death estate, including any ISA, and the available nil rate bands.
7State the final tax for each tax separately and note any planning point, such as the uplift on death.

Quickest way: Two-column check: CGT vs IHT

When to use it: Use it for objective test questions and for the first minute of a constructed response question.

Draw two columns: CGT and IHT. Put gift and death in two rows.
Lifetime gift: CGT yes (market value); IHT PET or CLT.
Death: CGT no (uplift); IHT yes (40%).
Holdover is available only for gifts of business assets or gifts that are CLTs. A gift of a non-business asset to an individual is a PET, so no holdover. BADR is a rate of 14%, not a deferral.
Any ISA: no income tax or CGT in life, but IHT applies in full at death.

Common mistakes in Interaction of IHT with Capital Gains Tax and ISAs

Saying a gift has no CGT because no money was received.
Students link CGT to sale proceeds.
Fix: A gift to anyone other than a spouse or civil partner is a disposal at market value.
Charging CGT on assets at death.
Death feels like a disposal.
Fix: Death is not a disposal. Beneficiaries get a market value base cost and the gain is wiped out.
Treating holdover relief as a permanent exemption.
The donor's gain disappears from the computation.
Fix: The gain is deferred. The donee's base cost is reduced by the held-over gain, so it comes back on their later sale.
Treating an ISA as free of IHT.
ISAs are called tax-free.
Fix: They are free of income tax and CGT only. The ISA balance is in the death estate at 40%.
Applying taper relief to the value of the gift.
The table reads as a percentage reduction.
Fix: Taper relief reduces the IHT payable on the gift, and only where death is more than 3 but less than 7 years after the gift. If the nil rate band left after earlier transfers in the seven years before the gift covers it, there is no tax to reduce.
Applying BADR as an IHT relief or using it for non-qualifying disposals.
Business reliefs are mixed up.
Fix: BADR is a CGT rate of 14% on qualifying gains up to £1,000,000 over a lifetime. IHT business reliefs are separate.

Worked examples

Example 1

Anna gives an investment property, which is not a business asset, to her adult son in June 2026. It cost £120,000 and was worth £300,000 on the gift date. Anna has made no other disposals this year and has taxable income of £60,000. She has made no earlier gifts. State the CGT payable and the IHT position.

Show the solution

CGT: the gift is a disposal at market value of £300,000.
Gain = £300,000 − £120,000 = £180,000.
Holdover is not available: the property is not a business asset and the gift is a PET, not a CLT.
Deduct the annual exempt amount: £180,000 − £3,000 = £177,000.
Anna is a higher rate taxpayer, so the rate is 24%. CGT = £177,000 × 24% = £42,480.
IHT: a gift to an individual is a PET, so there is no lifetime IHT.
It becomes chargeable only if Anna dies within seven years.

Answer: CGT payable is £42,480. There is no IHT now because the gift is a PET. IHT is due only if Anna dies within seven years.

Example 2

Ben dies holding an ISA worth £40,000 and shares bought for £20,000 and worth £90,000 at death. He leaves everything to his nephew. Explain the CGT and IHT consequences.

Show the solution

CGT: death is not a disposal, so there is no CGT on the £70,000 gain on the shares.
The nephew's base cost for the shares is £90,000, the market value at death.
ISA: the ISA wrapper ceases on death, so the income tax and CGT exemptions end, but the ISA is still part of the estate.
IHT: the ISA of £40,000 and the shares of £90,000 are in the death estate, total £130,000, plus Ben's other assets.
Gifts to a nephew are not exempt. The estate is taxed at 40% above the available nil rate band.
The available nil rate band is £325,000 less any chargeable transfers in the seven years before death.
The residence nil rate band is not available on these assets: they are not a residence and the nephew is not a direct descendant.
If the total estate is within the available nil rate band there is no IHT.

Answer: There is no CGT on death and the nephew's base cost is £90,000. The ISA and shares are both included in the estate for IHT, taxed at 40% only to the extent that the estate exceeds the available nil rate band (£325,000 less chargeable transfers in the seven years before death).

Exam tips

Write CGT and IHT as separate headings in a constructed response. Marks are awarded per tax.
Always state that a gift is a disposal at market value, then say whether holdover applies and why.
In objective test questions, watch for ISA and death wording. The answer is almost always that the ISA is in the estate.
Use the tax rates and allowances provided in the exam. Do not rely on memory for the rates.
State whether holdover needs a joint election. Examiners reward this.

Practice questions from The liabilities arising on chargeable lifetime transfers and on the death of an individual

Interaction of IHT with Capital Gains Tax and ISAs in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalIHT Planning, Variations and Interaction with CGT

Interaction of IHT with Capital Gains Tax and ISAs: frequently asked questions

Are ISAs subject to inheritance tax on death?

Yes. The ISA balance at death forms part of the estate for IHT and is taxed at 40% to the extent that the estate exceeds the available nil rate bands. The ISA only gives freedom from income tax and CGT during life.

Can I claim gift holdover relief and still have IHT on the same gift?

Yes. Holdover applies to the CGT and is claimed at the time of the gift. It is available only where the asset is a business asset or the gift is a CLT. A CLT has its IHT computed at once. A PET of a business asset can have holdover too, and IHT can still arise later if the donor dies within seven years.

Is there CGT when someone dies?

No. Death is not a disposal, and the beneficiary takes the assets at market value at the date of death. The uplift removes the gain. Unused losses cannot be passed to beneficiaries, but losses arising in the year of death can be carried back against gains of the previous three years.

Does business asset disposal relief reduce inheritance tax?

No. BADR only reduces CGT by taxing qualifying gains at 14% up to a lifetime limit of £1,000,000. IHT has its own separate reliefs.