Inheriting a property from a loved one can be both emotionally significant and financially complex. The process itself can be long and painful and that’s before you’re considering any potential tax bills that might arise. For many beneficiaries, one question is whether receiving the property creates a capital gains tax bill. Luckily, in most cases, the answer is no. You do not usually pay capital gains tax at the point you inherit a property.

However, a potential tax issue can arise later, if the property is sold, gifted, transferred, or otherwise disposed of after it has increased in value since the date of death. That distinction matters, particularly for larger estates investment portfolios or if there has been other taxable gains in the same year. A well timed decision can make a meaningful difference to the eventual tax bill. 

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What is capital gains tax (CGT)?

Capital gains tax (CGT) is a tax that applies when an investment sells for more than its original purchase price, known as its base cost. We usually think of capital gains tax in terms of selling stocks from an investment portfolio, however, it also applies to other forms of investments such as property or tangible assets.

With capital gains tax, you are taxed on the profit, or “gain”, you make on the sale, rather than the whole amount you receive. For instance, if you bought a piece of artwork for £6,000 and later sold it for £36,000, the gain would be £30,000. This is the amount that your CGT liability would be calculated on, less any annual exempt amount that's available.

How much capital gains tax will I pay? 

The rate of CGT you pay is related to your income tax band. There are four tax rates bands:

For residential property, the current CGT rates in the 2026/27 tax year are 18% for gains that fall within the personal allowance or basic rate band and 24% for gains that fall within the higher or additional rate bands and the annual exempt amount for individuals is £3,000. This means only gains above your available allowance are potentially taxable. 

Note: CGT is not payable on gains made when a residential property is your primary residence and always has been (apart from certain allowable absences). 

Does inheriting property trigger CGT?

Inheriting a property does not usually trigger capital gains tax immediately. HMRC states that you do not pay Capital Gains Tax when you inherit property.

Instead, the property is treated as being acquired at its market value on the date of death. This is often referred to as the probate value. If the property is later sold for more than that value, the increase in value may be subject to CGT.

For example, if you inherit a property valued at £500,000 on the date of death and later sell it for £575,000, the starting point for the CGT calculation is the £75,000 increase, not the full sale price. The taxable gain can then be reduced by things like your annual exception and allowable costs. 

Note: You are not able to carry forward any unused CGT allowance from previous tax years. 

How is the base value (probate value) determined for an inherited property?

The base value is normally the market value of the property on the date the previous owner died. This value is used for inheritance tax purposes and can also become the acquisition cost for CGT if the personal representatives or beneficiaries later dispose of the property.

For higher value properties, it is usually sensible to obtain a professional valuation rather than relying on a rough estimate. This is particularly important if the property is unusual, in a sought after area, jointly owned, let to tenants, or likely to be sold some time after probate.

The probate value (or base value) should be realistic and well evidenced. If it is too low, a later sale may appear to create a larger taxable gain. If it is too high, HMRC may challenge the valuation, especially where inheritance tax is also involved. Good records at this stage can make a future CGT calculation much easier.

When does CGT become liable on inherited property?

CGT can become liable when the inherited property is disposed of and has increased in value since the date of death. A disposal usually means selling the property, but it can also include gifting it, transferring it to someone else, or selling it for less than its market value.

If personal representatives sell the property during the administration of the estate, CGT may be due if the asset has risen in value since the person died or since it was valued for inheritance tax. HMRC confirms that transferring assets directly to a beneficiary does not itself create CGT for the estate.

If you receive the property as a beneficiary and later sell it, the gain is measured from the probate value to the disposal value. The longer you hold the property, and the more it increases in value, the greater the potential CGT exposure.

How to calculate CGT on inherited property?

To calculate capital gains tax on an inherited property, first work out the gain by subtracting the property’s probate value from the amount you receive when it is sold.

You can then deduct any allowable costs associated with the sale or improvements to the property. These may include estate agent and solicitor fees, as well as the cost of lasting improvements that increased its value, such as an extension, loft conversion or structural alteration. Routine maintenance, repairs, decorating and work that simply restores the property to its previous condition will not usually qualify.

Once these costs have been deducted, you can take off any unused CGT annual exempt amount. The remaining taxable gain is then added to your income for the tax year, which determines whether it is taxed at 18%, 24% or a combination of the two rates.

For example, if a property had a probate value of £500,000 and was sold for £575,000, the initial gain would be £75,000. After deducting £15,000 of allowable selling and improvement costs, the gain would fall to £60,000. If your £3,000 annual exempt amount remained available, the taxable gain would be £57,000. The amount of tax due would then depend on your wider income tax position.

What reliefs or exemptions may apply?

The most important relief for many people is private residence relief. If the inherited property becomes your only or main home, and you genuinely occupy it as such, some or all of the gain may be exempt from CGT when you sell.

However, the position depends on the facts. You usually need evidence that the property was genuinely your main residence, rather than a short term arrangement created only to reduce tax. HMRC may consider things like where you lived, where you were registered to vote, where your post was sent, and how long you occupied the property.

Married couples and civil partners can usually only have one main residence between them for CGT purposes. Unmarried couples may each have a different main residence, but this should still reflect the real living arrangements.

If the property is jointly inherited, each owner may be able to use their own annual exempt amount against their share of the gain. For the 2026/7 tax year, this is £3,000 per individual. Transfers between spouses and civil partners may also help with planning, although they should be considered carefully and completed before any sale is effectively agreed.

Total CGT = (taxable gain x tax rate)

If you’d like to check your calculations,  HMRC has a capital gains calculator which can do all the work for you.

Reporting and paying CGT on inherited property 

If CGT is due when you sell a UK residential property, you must usually report and pay it within 60 days of completion.

You may also need to include the disposal on your self assessment tax return. Any underpayment can then be settled, while an overpayment may be reclaimed.

Keep clear records of the probate value, sale price and allowable costs to help ensure the gain is calculated accurately.

Interaction with Inheritance Tax (IHT) and how it differs from CGT

Inheritance tax and capital gains tax are often confused, but they apply at different stages. Inheritance tax is generally considered on the value of the deceased person’s estate at death. Capital gains tax is concerned with any increase in value after death, when the property is later disposed of.

For example, if a property is worth £700,000 when someone dies, that value may be relevant for inheritance tax. If the beneficiary later sells the property for £800,000, the £100,000 increase may be relevant for capital gains tax.

This is why the date of death valuation is so important. It can affect the inheritance tax position for the estate and the CGT base cost for a future sale. Where the estate is large, the property is valuable, or several beneficiaries are involved, tax advice at probate stage can help avoid problems later.

Special cases and additional considerations

Several situations can make the CGT position more complex. If the property is rented out after inheritance, rental income may be subject to income tax, while any later increase in value may still be subject to CGT.

If the inherited property is held in a trust, the trustees may be responsible for tax depending on the type of trust and the beneficiary’s entitlement. HMRC notes that where a beneficiary becomes absolutely entitled to trust assets, trustees may pay CGT based on the market value at that point.

If the property is inherited by more than one person, each beneficiary is normally taxed on their share of the gain. This can make record keeping especially important, as each person’s tax rate and wider financial position may be different.

Non UK residents, second homes, overseas property, and properties with mixed personal and rental use can also require more detailed advice. The rules are not always intuitive, and a decision that looks simple from a family perspective may have tax consequences.

Strategies to minimise CGT liability on inherited property

Make an early decision. If the property is sold soon after death for close to the probate value, there may be little or no gain. Holding the property for several years may be sensible for personal or investment reasons, but it can increase the CGT exposure if the value rises.

Ensure the probate valuation is robust. A professional valuation can help support the base cost and reduce the risk of disputes later.

Make full use of available allowances and ownership structure. If the property is jointly owned, each beneficiary may have their own annual exempt amount. Married couples and civil partners may also consider transfers between them, provided this is done carefully and for genuine planning reasons.

Keep evidence of allowable costs. Legal fees, estate agent fees, and qualifying improvement works can all reduce the taxable gain. Without records, you may lose the benefit of deductions that would otherwise have been available.

Key steps for beneficiaries: what you need to know and do

If you inherit a property, start by confirming the probate value and keeping a copy of the valuation. Then decide whether the property will be sold, retained, rented out, transferred, or occupied as a main residence. Each option can have different tax consequences.

Before selling, estimate the likely gain and check whether a 60 day CGT report will be needed. Gather records of legal fees, estate agent fees, improvement costs, and any periods of occupation or letting. If more than one beneficiary is involved, agree who is responsible for collating information and instructing advisers.

You should also consider whether the sale interacts with your wider tax position. If you are already a higher or additional rate taxpayer, have investment gains, or expect a large bonus or pension withdrawal in the same tax year, planning ahead may help reduce unnecessary tax. 

How can we help?

If you are concerned about how much tax you may need to pay on an inherited property, or you want to understand how it fits into your wider financial plan, we can help. We can work with you to assess the likely CGT position, consider the interaction with inheritance tax, and identify practical steps that may reduce the tax payable.

If you would like to find out more about how we can help please get in touch and arrange a free initial consultation.

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Please note that the Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

This article is intended as information only and does not constitute financial advice.  

The information contained in this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing.  Levels, bases and reliefs from taxation may be subject to change.

This article has been updated and re-published following the changes announced at the Autumn Budget on 30th October 2024.
 

Pensions, like most forms of income, incur taxes. However, there are ways to ensure you’re not unnecessarily overpaying in tax, even when you’ve retired.

Do you pay tax on your pension?

The short answer to this question is yes, so long as your pension exceeds the minimum threshold for paying income tax.

Income from a pension is taxed exactly like any other form of non-savings income. Firstly, everyone has a personal allowance, which is the amount of money you’re allowed to earn each year before you start paying income tax. Currently, the personal allowance is £12,570 (though this may be reduced if you have earnings above a certain level), so if you receive less than £12,570 per annum of taxable income, then you pay no income tax. Once your taxable income goes above this level you become liable to pay 20% income tax on taxable income between £12,571 and £50,270 per annum. This then increases to 40% income tax for taxable income between £50,271 and £125,140, and 45% beyond that. These income tax rates are valid as of 2025. For updated and current tax rates, see our latest tax tables. 

It’s worth noting however, under certain circumstances, you do not need to pay tax on all of your pension income. Additionally, there are strategies you can adopt to minimise the amount of tax you pay on your pension. 

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How much will I be taxed on my pension?

Another frequently asked question is “how much tax do you pay on your pension?”. As stated above, the amount of income tax you pay on your pension depends how much income you draw from your pension.

The good news, is that some of your pension is, in fact, tax free. If you have a defined contribution pension, whereby your pension is based on how much you and/or your employer have saved into it — which is the most common kind — then you can take out 25% of your pension completely tax-free, subject to a max of £268,275, this is known as the Lump Sum Allowance (LSA).

It is important to understand that, although possible, this does not need to be taken out as one single lump sum. It is possible to take out multiple smaller lump sums each with 25% tax-free, or just take portions of tax-free cash over time rather than all at once (known as phasing), as long as your pension allows for ‘flexi-access drawdown’. The remaining 75% will be taxed according to the standard rules explained above.

If you are only receiving the new state pension, on the other hand, then you do not need to worry about income tax. As of 6th April 2024, the full new state pension is £230.25 per week, or £11,973 per year  — since this amount is within your personal allowance there will be no income tax to pay. Most people who have worked throughout their lifetime will be eligible for a state pension, although the amount you receive will depend on your national insurance record.

However, if you have income from other sources bringing your yearly income higher than £12,570, then you may be expected to pay income tax.

What other forms of tax for my pension should I be aware of?

Income tax is the main tax you can expect to pay on your pension. Previously the lifetime allowance, stood at £1,073,100 and additional tax may have been due if your pension exceeded this limit. However, in the Spring Budget 2023 it was announced that the charge and the lifetime allowance itself would be removed entirely as of the 2024/25 tax year, while a 0% charge would apply to any excess pension above the lifetime allowance in the 2023/24 tax year. There is, naturally, political risk of legislation changing with regard to this tax charge.

The lifetime allowance has now been replaced by the Lump sum Allowance  (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA).

How much can a pensioner earn before paying tax?  

A pensioner can earn up to the personal allowance before having to pay any income tax, which, as mentioned above, is currently £12,570 for the 2025/26 tax year. This personal allowance is the same for everyone regardless of whether you are retired or still working. Your taxable income from a pension, along with any other income you may have, is added together to determine how much tax you will pay. If your total income for the year is less than or equal to the personal allowance, you will not have to pay any income tax on it. 

How do I drawdown on pension without paying tax?  

While you cannot fully drawdown on your entire pension without paying tax, as we've mentioned there is a portion that is completely tax free. You are entitled to take up to 25 per cent of your pension pot as a tax free lump sum, subject to a maximum of £268,275, which is called your tax free cash or pension commencement lump sum. The remaining 75 per cent will then be taxed as an income. Of course, the benefit is you do not have to take all of your tax free cash in one go; you can take it in stages and combine it with taxable withdrawals to manage your income and stay within a lower tax band.  

How do I avoid tax on an inherited pension lump sum?  

Avoiding tax on an inherited pension lump sum depends on the age of the person who has passed away. If the pension holder was under the age of 75 when they died, a beneficiary can inherit the entire pension pot as a tax free lump sum. However, if the pension holder was 75 or older when they died, any inherited lump sum will be taxed at the beneficiary’s marginal rate of income tax.  

These rules are changing, however. From April 2027 pensions will form part of a person's estate for inheritance tax purposes, regardless of your age.  

This is a complex area and there are different rules depending on whether the beneficiary takes the money as a lump sum or as a regular income from a drawdown scheme.  

How do I avoid paying emergency tax on a pension lump sum? 

Emergency tax is often applied to the first withdrawal you make from your pension if you take it as a lump sum and your pension provider does not have an up to date P45 from you. This is because HMRC will assume that this is a regular monthly income, and they will apply an incorrect tax code, which often results in you paying far more tax than you should. To avoid this, it is often better to take a small initial lump sum and then take further withdrawals after you have received a correct tax code from HMRC. Alternatively, you can apply for a tax refund from HMRC once the tax year has ended. 

How to avoid paying tax on your pension

If you want to mitigate tax on your pension, the only certain way to do it is to ensure that your total taxable non-savings income, including your pension income, is below the personal allowance. However, this will likely not permit you your desired standard of living in your retirement years.

Instead, there are a few tips and tricks for limiting the amount of tax you are liable to pay on your pension. These are outlined below:

Only withdraw the amount you need each tax year

Of course, you should take out as much as you need to live a comfortable life, but you might want to keep an eye on staying within certain tax thresholds. For example, if you are careful to take out no more than £50,270 in the current tax year, including any other income sources, you will only need to pay 20% income tax. However, if you were to take out £50,271 or more, you’d pay 40% on the amount over £50,270, up to the next tax threshold. 

Note that at retirement stage, you aren't required to draw down on your pension income to put into savings. This means it can be more financially beneficial to withdraw less, or none, and stay within a low tax range, rather than withdraw more and have to pay substantially more tax.

Take advantage of a drawdown scheme

Drawdown allows you to vary your income from year to year, meaning you can opt to keep it below a certain tax range in a given year. This is not possible for you, however, if you have an annuity, since annuity income cannot be varied at will. Bear in mind that drawdown does come with some risks, so always check with a financial advisor before you pursue it as an option.

Don’t draw your pension in one go

As is evident from the points above, staggering your pension so that you receive less on an annual basis ultimately means you will pay less tax. While you might be tempted to empty your pension pots in one go, it will mean paying income tax on that amount in one year. In most cases, this would be a poor decision from a tax perspective as it may result in your income falling into the higher tax rate bands and triggering a significantly larger tax bill.

Phasing your 25% tax free cash 

In the event that you need to draw more than £50,270 from your pension, you would be liable for 40% income tax on any further income until the next tax band or if you go over £100,000 and hit the 60% tax trap. It is possible, in this instance, to take smaller amounts from your tax-free cash to top up your income when you reach these limits. When planned with care, this can be an excellent retirement income strategy to ensure you do not pay higher rates of income tax.

The importance of Pension Freedoms

With the introduction of Pension Freedoms in 2015, this allows far more flexibility for an individual when they come to draw their pensions.  An individual can now draw their pension from minimum pension age onwards, when and if they like, in any portion that they like. As well as this flexibility allowing an individual to tailor their income needs around their chosen lifestyle, it also allows far more flexibility with regards to tax planning, including income tax, as well as inheritance tax, which are all intertwined when planning in this nature. It is therefore important that your pension schemes have adopted the Pension Freedoms to ensure that you have absolute flexibility both on drawing an income as well as on death. It is important to note that not all pension schemes have adopted modern flexibilities. If you are unsure, get in touch.

So, the only way to truly avoid paying tax on your pension is to ensure your pension withdrawals (including your state pensions) do not exceed £12,570 per year.

Ways to reduce tax on your pension however include:

• Not withdrawing more than you need from your pension each year.
• Utilising a drawdown scheme so that you can vary your yearly pension income.
• Avoid drawing large pensions in one go.
• Phasing tax free cash.

How can we help?

The Private Office offers advice from one of our experienced advisers, on how best to manage your pension, including how to avoid paying unnecessary extra tax. Get in touch to arrange a free consultation.

Arrange your free initial consultation

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.

The Financial Conduct Authority (FCA) does not regulate estate planning or tax advice.

Buy-to-let (BTL) investments have long been seen as a reliable way to generate income and build wealth, whether as part of a broader investment strategy or as a supplement to pension planning. However, the environment for landlords in 2025 is proving increasingly difficult to navigate, so it's no surprise that we’ve seen a noticeable uptick in enquiries from clients questioning whether it’s time to sell their buy-to-let property or second homes, or, in many cases, having already done so.

This shift in sentiment is backed by recent data. According to Rightmove the proportion of rental properties moving to the sales market is at record levels, with landlord sales now accounting for 1 in 5 homes listed. And this isn’t just a trend; it’s fast becoming the new reality for many investors faced with tightening margins and rising compliance costs.

So, what’s driving this change? And more importantly, should you be reviewing your own buy-to-let strategy?

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What’s changed for landlords in 2025?

It’s not just one thing it’s the cumulative effect of tax, regulation, finance costs, and legislative uncertainty that’s making landlords question the long-term value of their investments.

Interest rates and mortgage affordability

• While interest rates may have peaked earlier in 2025, they remain significantly higher than during the ultra-low rate environment of the 2010s. For many landlords coming off longer term cheap fixed rate deals, monthly mortgage costs have surged.

Tax pressures continue to bite

• Since the removal of full mortgage interest tax relief in 2020, landlords have felt the pinch, especially higher and additional rate taxpayers. With personal tax allowances frozen until at least 2028, and the additional rate threshold cut from £150,000 to £125,140, more landlords are finding themselves pushed into higher tax bands without a corresponding increase in real income.
  In essence, your rental income is now taxed on gross receipts, not net profit, resulting in higher tax bills even as operating costs rise.
  Corporation tax changes have also added a layer of complexity. For landlords operating via limited companies, the main rate of corporation tax is now 25%, and while allowable deductions can still be claimed, dividend tax on extracted profits eats into post-tax returns.

Regulatory burdens and energy efficiency rules

• Although the government scrapped the 2025 EPC C requirement in 2023, the issue has returned to focus. Earlier this year the government opened a consultation on new minimum energy performance standards for rented homes, proposing an ‘equivalent of EPC C’ by 2030.

  For landlords with older properties, the potential retrofit costs could run into the tens of thousands, especially for those with multiple properties in need of substantial upgrades. 

  Another factor for some is the Renters’ Reform Bill which could become law by the end of 2025, bringing major changes for landlords. Key proposals include the abolition of Section 21 ‘no-fault’ evictions, new minimum housing standards, and a national landlord register. If passed, it could make it harder to regain possession of properties and increase compliance requirements. We expect more clarity in the Autumn Budget.

It’s not just landlords. Second homeowners facing further costs

In addition to challenges for landlords, second homeowners are also seeing rising costs. Several local authorities across the UK have introduced or increased council tax premiums on second homes, with some charging up to double the standard rate. There’s also growing pressure on the government to tighten tax rules further in the Autumn Budget, potentially reducing reliefs or increasing CGT on second homes. For those holding property primarily for capital growth, the financial benefit is becoming harder to justify.

What are your options in today’s market?

With all these pressures, you may be wondering whether to continue holding your buy-to-let, restructure your ownership, or exit altogether. Here are a few key options to consider:

1. Hold – but reassess your strategy

If you're on a favourable fixed-rate mortgage and your property still generates strong yields, it might make sense to hold. But don’t assume what worked before still works now, a financial review is critical. Understanding the true after-tax return, accounting for interest costs, and forecasting future maintenance or EPC-related costs is essential.

2. Incorporate – moving your portfolio into a limited company

Incorporating your portfolio may allow you to offset mortgage interest and other expenses more effectively. But the decision isn’t straightforward, higher mortgage rates, stamp duty costs on transfer, and corporation tax can outweigh the benefits. This route can work well in the long-term, but you’ll need careful tax and legal advice before making any changes.

3. Transfer ownership to a lower earning spouse

If your partner is a basic-rate taxpayer, transferring part or full ownership of the property may help reduce the overall tax bill. This must be done properly to avoid triggering tax charges, so working with a solicitor is recommended.

4. Sell and reinvest

If the numbers no longer work or the hassle is no longer worth it, selling may be the right move. Whether you’re unlocking equity to pay off debt, support retirement, or diversify your investments, there are viable alternatives to bricks and mortar.
From diversified investment portfolios to tax-efficient vehicles like ISAs, pensions or bonds, we can help design a solution tailored to your goals, tax situation, and risk appetite. You don’t have to give up on income, just the stress that often comes with being a landlord.

Keep one eye on the market, and the other on the Chancellor

Buy-to-let remains a viable strategy for some but it’s certainly no longer the "easy money" investment it once was. The landscape has changed, and for many landlords, the numbers are becoming harder to justify.

Whether you're an accidental landlord with one property, or a company landlord managing a small portfolio, now is the time to review your strategy, particularly ahead of the Autumn Budget 2025, which could shift the dial once again.

If you’re thinking of selling your buy-to-let property or want to explore other ways to invest more efficiently, we’re here to help. At The Private Office, we work with landlords and investors just like you, people with over £100,000 in investable assets who want clarity, confidence, and control over their finances.

We’re a team of award-winning Financial Planners, and we’d be happy to help you understand your options and make informed decisions for the future.

Arrange your free initial consultation

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. 

The value of your investments can go down as well as up, so you could get back less than you invested.

Your buy-to-let property may be repossessed if you do not keep up repayments on your mortgage.

The Financial Conduct Authority does not regulate tax planning and some forms of buy-to-let. 

Divorce and separation can be emotionally and financially complex, and for many, one key concern is whether Capital Gains Tax (CGT) will apply when assets are divided.

While transfers between spouses and civil partners are generally free of CGT thanks to the spousal exemption, this can change once a couple separates. Knowing when the exemption applies, how property sales are treated, and what reliefs may be available can help you make informed decisions and potentially reduce your tax liability.

Do you pay capital gains tax on divorce or separation?

Spousal Exemption Rules

When spouses or civil partners transfer assets between each other, those transfers are normally exempt from CGT, provided they are “living together” in that tax year.

This exemption only applied until the end of the tax year in which the couple separated. However, from 6 April 2023, the government extended the CGT rules to allow more time for tax-free asset transfers during divorce or dissolution.

Rules that came in from April 2023

Under current legislation (as of 2026), separating couples have:

• Up to 3 tax years after the tax year of separation to transfer assets between themselves without triggering CGT.
• Unlimited time to transfer assets between themselves without CGT if the transfers are made under a formal divorce or dissolution agreement (such as a court order or consent order).

This applies to both divorcing spouses and civil partners ending a civil partnership.

This change provided much-needed breathing room for separating couples and their advisers to arrange a fair settlement without being rushed by tax deadlines.

How Capital Gains Tax is calculated after separation

Once the exemption window has passed, any transfers of assets between the former spouses or civil partners may be treated as gifts for CGT purposes, meaning the person transferring the asset may be liable for tax based on market value.

Each individual is responsible for their own gains and losses and is taxed accordingly. This means CGT can be different for each party, depending on the assets they receive and their overall tax situation.

You may also be able to use your annual CGT exemption, which as of the 2025/26 tax year is £3,000 per person (note: this amount has been reduced significantly in recent years).

Capital Gains Tax and the family home

The family home (principal private residence) often forms a significant part of a divorce settlement, and its tax treatment deserves careful attention.

Principal Private Residence Relief (PPR)

If the property has been your main residence for the entire period of ownership, you’ll typically qualify for full Principal Private Residence Relief, which exempts the gain from CGT.

However, complications can arise when one spouse moves out before the home is sold or transferred or the property is retained jointly for a period after separation.

Key points for the marital home

• The spouse who remains in the property can usually claim full PPR.
• The spouse who moves out may still claim full PPR if the home is sold or transferred to the other spouse within 3 years of moving out.
• If the property is transferred under a formal divorce agreement, the departing spouse can continue to claim PPR indefinitely, provided certain conditions are met.

Conditions for extended PPR relief

To benefit from this continued relief beyond the 3-year window, the following must apply:

1. The property is transferred to the spouse who continues to occupy it as their main home.
2. The transfer is made as part of a formal divorce or dissolution agreement (e.g. court or consent order).
3. The transferring spouse has not elected another main residence during this time.

This ensures that individuals aren’t penalised with CGT simply for leaving the marital home as part of a fair settlement.

Can you avoid Capital Gains Tax on divorce?

It’s possible to minimise or avoid CGT when divorcing, with careful planning and timing. Here are some tips:

• Use the spousal exemption window effectively, now up to three tax years, or indefinitely with a court order.
• Make use of each person’s annual CGT exemption.
• Consider how to divide assets in a way that balances gains and losses between you.
• Where possible, structure transfers under a formal divorce agreement to extend tax reliefs.
• If selling the family home, check your eligibility for Principal Private Residence Relief.

It’s also important to consider how timing your separation may impact tax planning. For example, separating in April gives nearly a full tax year to plan CGT-efficient transfers, whereas separating late in the tax year (e.g. March) shortens the timeline.

Other considerations include, if the property is larger than 0.5 hectares (about 1.2 acres), only the main house and permitted garden may qualify for full PPR. Also, if you or your ex-spouse move abroad, non-resident CGT rules may apply. 

Lastly, CGT planning should be integrated with broader financial and legal advice as part of your settlement.

How we can help

Changes to rules mean that paying Capital Gains Tax on divorce or separation offers greater flexibility and relief, especially when transfers are made under formal agreements. However, by understanding the updated rules around spousal exemptions, PPR, and settlement structuring, it’s possible to minimise or even avoid CGT exposure during a divorce.

If you’re navigating separation and unsure of your tax position, it’s a good idea to speak with a qualified financial planner or tax adviser.

If you need advice on financial planning during divorce, arrange a free consultation to discuss your situation and get tailored guidance.

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This article is intended for general information only, it does not constitute individual advice or legal decisions and should not be used to inform financial decisions.

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax, or trust advice.

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When it comes to inheritance tax (IHT) planning, most people naturally want to preserve as much of their wealth as possible for their family and loved ones. And rightly so, after a lifetime of hard work, you want to pass on your legacy, not lose a large portion of it to the taxman.

But the reality is without proper planning, even modest estates can face significant IHT bills. One common, and costly mistake is gifting your home while continuing to live in it. This may fall foul of the IHT rules, known as a “gift with reservation of benefit” and it’s a trap that catches out well-meaning families.

Let’s break it down. 

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What is a gift with reservation?

Put simply, a gift with reservation happens when you give something away but still keep some benefit from it.

The classic example? Parents transferring their main residence to their children but continuing to live there rent-free. While this may seem like a clever way to reduce the value of your estate, HMRC doesn’t see it as a true gift, and they’ll treat it as though you never gave the property away at all.

As one judge famously put it: ‘not only may you not have your cake and eat it, but if you eat more than a few de minimis crumbs of what was given, you are deemed for tax purposes to have eaten the lot.’

How do they affect inheritance tax liability?

Under current rules, if a gift is deemed to include a reservation of benefit, the full value of that gift is pulled back into your estate for IHT purposes, no matter how long ago it was made.

That means the usual 7-year rule (where gifts fall outside your estate after 7 years) doesn’t apply. Instead, the asset could still be taxed at up to 40% on your death.

Compare that with a genuine gift:

If you give away an asset to an individual and retain no benefit, and survive seven years, the gift is likely to be completely outside your estate. These are called Potentially Exempt Transfers (PETs). 

How it works in practice

Let’s say in 2025, John gifts his £600,000 home to his daughter but continues living there rent-free. He passes away in 2032.

Even though seven years have passed, HMRC will treat the house as still being part of his estate, because he kept living there without paying rent. That could mean a £240,000 tax bill (40% of £600,000) on the home alone.

Now imagine John had paid full market rent from the start. In that case, the gift would be considered a genuine PET. Provided he lives for seven years, no inheritance tax would be due on the property. 

How can you gift the family home, properly?

If you’re thinking of passing on your home but still want to live there, you must pay full market rent to avoid it being a gift with reservation. That rent should be backed up with a formal agreement and reviewed regularly to reflect market rates. 

There’s a silver lining here: paying rent can actually help reduce your taxable estate by reducing your cash reserves. But of course, the rent becomes taxable income for your children, so this needs to be factored in.

Holiday homes count too: if you gift one but still use it occasionally, you should pay market rent for each use, or HMRC may challenge it. 

What about Capital Gains Tax (CGT)? 

Gifting an asset, especially one that has increased in value, can also trigger Capital Gains Tax (CGT), which adds another layer of tax complexity.

• If the property is your main residence, CGT usually isn’t payable when you gift it.
• If it’s a second home or investment property, CGT could apply on the gain at the point of gifting.

Here’s a twist: if you hold onto the property and pass it on when you die, your heirs benefit from a Capital Gains Tax uplift, the property is revalued at the date of death, which can significantly reduce CGT if they sell it later.

But if you make a gift with reservation, your estate may still be taxed as if you owned the asset, but your heirs won’t benefit from that CGT uplift. It’s the worst of both worlds. 

Moving into care – does that change things?

If you’ve gifted your home but still live in it rent-free, it’s a gift with reservation.

However, if you later move permanently into a care home, you no longer benefit from the property. From that point, the 7-year PET clock starts.

But here’s the catch: research from the Office for National Statistics (ONS) showed the average stay in a care home is between 2 to 7 years, so it’s statistically unlikely that moving into care will make the gift effective for inheritance tax planning, unless you move fairly soon after the gift.

On the other hand, if you were paying market rent from the beginning, your 7-year clock already started when the gift was made, and moving into care has no impact on the IHT position.

⚠️ Note: Gifting your home to avoid paying for care fees could be seen as deliberate deprivation of assets. Local authorities can investigate this and may still assess you as owning the property. 

2025/26 Inheritance tax thresholds recap

Nil-Rate Band: £325,000 – the standard IHT-free allowance, frozen until 2031.

Residence Nil-Rate Band (RNRB): £175,000 – available if you leave your home to direct descendants (children, grandchildren, etc.). Starts tapering once your estate exceeds £2 million.

Married couples and civil partners can combine allowances. That means a couple could potentially pass on up to £1 million tax-free if they qualify for both the nil-rate and residence nil-rate bands. 

Why the residence nil-rate band changes the game

Since the introduction of the RNRB, fewer people need to gift their home to their children during their lifetime. That’s because doing so could mean losing access to this valuable allowance.

By retaining your home and planning more strategically with your liquid assets, such as cash or investments, you may be able to reduce your IHT exposure without falling into the gift with reservation trap.

For example, making gifts from surplus income or investment portfolios, and retaining the family home to benefit from the RNRB, is often a more effective strategy. 

How we can help

Estate planning is complex, and what works for one person may not be right for another. Gifting your home might seem like a smart move at first glance, but without careful planning, it could land your estate with an unexpected tax bill.

If you’re considering giving away your property or want to understand your options for reducing inheritance tax, it’s crucial to get professional advice early.

If you’d like help navigating the latest inheritance tax rules and exploring the best options for your estate, we’re here to help. Book your free initial consultation with one of our advisers today and start your planning with confidence. 

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The Financial Conduct Authority (FCA) does not regulate cash flow planning, estate planning, tax or trust advice. 

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

Inheritance tax (IHT) is a tax levied on an estate before the assets are passed to the beneficiary via inheritance or as a gift. Although IHT is paid on death, it can also apply to some gifts that are made before the person dies. If you’re making a financial gift, you need to understand whether the gift is tax-free, or whether it will create a tax bill, either immediately or further down the line. That’s why it’s critical to understand the 7 year gift rule in inheritance tax.

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Introduction to inheritance tax 

Before we explain the 7 year gift rule in inheritance tax, it’s important to provide a basic overview of what we mean by the term “inheritance tax”. 

Simply put, inheritance tax is a tax on the estate (i.e. money, possessions, property) of a person who has died. It's a one-off tax that must normally be paid within 6 months of the deceased's death (exceptions may apply). IHT is also referred to as a cumulative tax because it takes into account earlier gifts when assessing the amount of tax that is due. 

Currently, the nil-rate band (i.e. tax threshold) for inheritance tax is £325,000 for individuals, or a combined nil-rate band of £650,00 for married couples or civil partnerships in addition to the main residence nil-rate band (RNRB) currently £175,000 (per individual), whereby no tax is paid on amounts at or below this level. However, any balance over this threshold could be subject to a tax charge which at present, is a standard inheritance tax charge rate of a hefty 40%, or 36% where 10% of the net estate is left to charity. Other tax rate charges may apply and are discussed later in this article.

You’re also going to be hearing the term “gift” throughout this article. But what is a gift? Forget about ribbons and wrapping paper. HM Revenue and Customs (HMRC) defines a gift as something which has a value (i.e. possessions, money, property), or a loss of value that occurs when something is transferred (i.e. if you sell a house for less than it’s worth to your children, the difference in value is defined as a gift). These gifts are sometimes referred to as gifts ‘inter vivos’, which simply means gifts made between living people. For inheritance tax purposes, gifts inter vivos can still be relevant when calculating the value of an estate, particularly if the person making the gift dies within 7 years.

For more information about general inheritance tax-related topics, we have created a handy downloadable guide. 

Understanding the 7 year gift rule in inheritance tax 

So, what is the 7 year rule in inheritance tax? Essentially, there are a range of gifts that are exempt from inheritance tax. Everything else is defined as either a chargeable lifetime transfer (CLT), which is for gifts into a discretionary trust that may be subject to an immediate 20% IHT charge (if paid by the trust, or 25% if paid by the settlor), or a potentially exempt transfer (PET) where the gift will only be completely tax-free if you live for 7 years after gifting it (assuming that the gift has been given to an individual, rather than a business or trust). Potentially exempt transfers are therefore a key part of the 7 year rule, because they may become fully exempt from inheritance tax if the donor survives for 7 years after making the gift. If you die within 7 years of gifting the asset, then the gift will count towards your nil-rate band, as we mentioned above, meaning that it may still be subject to IHT. After 7 years, the gift doesn’t count towards the overall value of your estate. This is known as the 7 year gift rule in inheritance tax. However, the 14 year rule may mean that a failed CLT brings a previous PET back into the estate for assessment.

What is the gift inheritance tax threshold? 

As we stated earlier in the article, the inheritance tax threshold (also referred to as the nil-rate band) is £325,000 plus the £175,000 RNRB (if available). This is the total amount of your estate that you can pass onto your inheritors without paying IHT. However, if the value of your estate exceeds the gift inheritance tax threshold, you’ll have to pay inheritance tax on anything above the threshold. For example, if your estate is valued at £450,000, you will only need to pay inheritance tax on £125,000 (assuming no RNRB is available). 

Inheritance tax-free gifts 

If you die within 7 years of gifting an asset to an individual, the 7 year gift rule in inheritance tax means that the beneficiary may be required to pay IHT. If you want to protect your wealth for your loved ones, it’s important to remember that some gifts don’t incur any inheritance tax charges if you give them away while you’re still living. 

Inheritance tax-free gifts include: 

• Gifts to your partner or spouse – any gifts you make to your long-term resident spouse (previously uk domiciled) are free from inheritance tax. However, if you are classed as long term resident when you die and your surviving spouse is not, the tax free amount is limited to £325,000.
• Wedding gifts – in a wedding/civil partnership, you can gift (free from inheritance tax) up to £5,000 to a child, £2,500 to a grandchild/great grandchild, or £1,000 to anyone else.
• Gifts from your income – as long as the gift doesn’t affect your normal standard of living, you can make gifts out of your normal income, i.e., Christmas/birthday/anniversary presents, regular payments, life insurance policy premiums, etc.
• Gifts to assist with family maintenance – gifts helping your relatives (i.e., ex-spouse/former civil partner, a child, or a dependent relative) with living expenses are free from inheritance tax.
• Gifts to charities – you can make gifts of any value to charities, universities, museums, and community sports clubs without paying inheritance tax.
• Gifts to political parties – finally, gifts to political parties are exempt from inheritance tax if, at the last general election before your death, the party either had at least two MPs elected to the House of Commons, or had one MP elected and, across all constituencies where it stood candidates, the party received at least 150,000 votes in total.

There’s also an annual exemption for inheritance tax-free gifts worth up to £3,000. In other words, every year you can gift up to £3,000 free from inheritance tax. Furthermore, you can carry over an unused annual exemption from the previous year, provided that the current year's allowance is used first. Remember that gifts valued above the gift inheritance tax threshold of £3,000 are subject to IHT. In addition, there’s the small gifts exemption, which enables you to make an unlimited number of small inheritance tax-free gifts each year, outside of your annual exemption. These gifts are for up to £250 each, provided that you have not already used another exemption for the same person. 

What is taper relief? 

Another key aspect of the 7 year rule in inheritance tax, is taper relief. Essentially, taper relief comes into play if the benefactor doesn’t live for the full 7 years. It means that if the benefactor survived for 3 years or longer, the inheritance tax payable is applied on a sliding scale. As you can see, it’s better to give gifts earlier, rather than later. 

Remember, taper relief only applies to the amount of tax the recipient has to pay on the value of the gift that’s above the nil-rate band. 

For example, suppose Person A gifted £600,000 to their son in May 2016. Person A died in March 2021, having left their £1,200,000 estate to their son as well. Because Person A died within 7 years of making the gift, it contributes towards their nil-rate band. IHT is due on the value of the gift above the nil-rate band (£600,000 - £325,000 = £275,000), but because Person A died 4-5 years after making the gift, the amount of IHT their son is required to pay was reduced by 40%. So, the overall amount of inheritance tax that Person A’s son needed to pay was £66,000 (£275,000 x 24% = £66,000). 

Because the gift used up Person A’s entire nil-rate band, their son will need to pay inheritance tax on the estate at the full 40% IHT rate as well. This means that the estate of Person A had to pay £480,000 (£1,200,000 x 40% = £480,000) before the assets could be distributed. 

There are separate rules around property, which means a higher nil-rate band is available for some, known as the residence nil-rate band. The residence nil-rate band is only applicable to direct descendants, so it’s important you understand the rules depending on who is receiving the gift, how the tax is applied to the gift and how these different rules apply to you.  

Pensions and inheritance tax

Although currently pensions usually fall outside your estate for inheritance tax purposes, it’s important to understand how your pension wealth is passed on. If you die before the age of 75 and your pension is in a defined contribution scheme, your beneficiaries can usually inherit the fund tax-free. If you die after 75, the money passed on will be subject to income tax at their marginal rate, but not IHT.

However, this is all set to change. In one of the most significant recent announcements, the government has confirmed that from April 2027, unspent defined contribution pensions will be included in a person’s estate for inheritance tax purposes. This will bring pensions under IHT for the first time in decades, affecting many estates that previously expected to fall below the threshold. As pensions often represent a substantial portion of an individual’s total wealth, this change could lead to a notable increase in the number of estates facing IHT liabilities. Reviewing how your pension is structured and who is nominated as your beneficiary is essential.

Who pays inheritance tax on gifts?

If you end up incurring IHT on gifts because of the 7 year gift rule in inheritance tax, you’re probably wondering who’ll actually need to make the payment to HMRC. It’s a legitimate question.

If your estate is above the nil-rate band, funds from your estate will be used to pay inheritance tax to HMRC. This will be dealt with by the person who is dealing with the estate (if there’s a will, this person is referred to as the executor). When it comes to gifts, if the benefactor dies before 7 years have elapsed, the recipient of the gift may have to pay IHT.

How can we help? 

The gift inheritance tax threshold along with the broader 7-year gift rule, is a fairly complex topic. Understanding how gifts ‘inter vivos’ and potentially exempt transfers fit into your wider estate planning can help you make more informed decisions about passing on wealth during your lifetime. If you would like to discuss your specific situation and explore inheritance tax planning options, please contact The Private Office for a free initial consultation with one of our financial advisers.

Arrange your free initial consultation

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.