Capital Gains Tax or Inheritance Tax: which is the bigger threat to your wealth?

Inheritance Tax (IHT) has been in the news a lot in recent months after Rishi Sunak revealed that he was considering the possibility of scrapping it.

This is likely to prove a popular policy as IHT is often considered the “most hated tax,” with many people feeling that it amounts to taxing income twice. Additionally, the number of people paying IHT is on the rise.

Indeed, FTAdviser reports that HMRC collected £3.9 billion in IHT between April and September 2023. This is an increase of £400 million on the same period the previous year.

As a result, you may be concerned about a potential IHT charge.

However, if you only focus on IHT, you may be overlooking other taxes that could threaten your wealth, such as Capital Gains Tax (CGT). 

You may pay this tax on profits from selling or “disposing of” assets while you are alive and your Annual Exempt Amount – the amount of gains you can make without a tax charge – recently fell to £6,000.

As such, you could lose a significant amount of your wealth to CGT, and it could be equally as important as IHT to consider.

Read on to learn whether IHT or CGT is likely to pose the biggest threat to your wealth.

IHT nil-rate bands are frozen until 2028

In his Spring Budget, Jeremy Hunt announced that the IHT “nil-rate band” – the amount that you can pass on without triggering an IHT charge – would be frozen at its current rate of £325,000 until at least 2028.

As a result, IHT receipts have risen considerably and 2023 is predicted to be a record-breaking year. According to the Office for Budget Responsibility (OBR), the government is forecasted to raise £7.2 billion from IHT by the end of the 2023/2024 tax year – an increase of £1.1 billion on 2021/2022.

As property prices increase and you may generate investment returns or interest on cash savings, the value of your estate could rise over time. As long as the nil-rate band remain frozen, this could mean that you are more likely to pay IHT in the future. 

The nil-rate band has been the same since 2009/2010, yet in that time, there have been other changes which could make it easier to manage your IHT liability.

For instance, since 2008, you have been able to transfer your unused nil-rate band to your spouse. This could allow your surviving spouse to pass more of your estate on to your family when they die.

Additionally, in 2017/2018, the government introduced the “residence nil-rate band” of £175,000, which applies when passing on your main residence to a direct descendant. 

When combined with the standard nil-rate band of £325,000, this means you can normally pass on £500,000. As a result, if you or your spouse inherits the other’s unused nil-rate bands, the surviving spouse could potentially pass on up to £1 million tax-free.

You may also be able to reduce your IHT liability through lifetime gifting or using trusts. 

As such, the UK’s most hated tax may not affect you as much as you think, provided you consider it ahead of time and work with a financial planner to find ways to reduce it.

CGT raised £15.3 billion in the 2021/2022 financial year

IHT is a contentious subject and there are often calls for the tax to be reformed or scrapped altogether.

Yet, CGT doesn’t normally get the same attention and while it may not be popular, it isn’t vilified in the same way as IHT. This is despite the fact that HMRC raises significantly more money from CGT than IHT.

According to the UK government, HMRC raised £16.7 billion from CGT in 2021/2022, with 394,000 people paying the tax.

In comparison, the most recent figures from the UK government show that it raised £6.1 billion from IHT in the same year.

Additionally, as reported by Sky News, 27,000 estates paid IHT in 2021/2022. This means that less than 4% of deaths incurred an IHT charge.

So, while IHT receipts may be rising, the reality is that CGT could be more likely to affect you and it makes up a much larger portion of the tax intake.  

The CGT Annual Exempt Amount is set to reduce to £3,000 in April 2024

In April 2023, the CGT Annual Exempt Amount fell from £12,300 to £6,000. In practice, this means that you can earn £6,000 in the 2023/2024 tax year from selling assets before you are likely to face a CGT charge.

CGT is payable on the profits, not the total amount that you sell the asset for. For example, if you purchase a painting for £10,000 and sell it for £15,000, only the £5,000 difference is considered for CGT.

You will likely pay CGT on any profits beyond your Annual Exempt Amount, and the rate depends on your marginal rate of Income Tax. You could pay:

  • 10% if you are a basic-rate taxpayer (18% for a qualifying residential property)
  • 20% if you are a higher- or additional-rate taxpayer (28% for a qualifying residential property).

For instance, say that you sold some non-ISA stocks for a £10,000 profit. After your £6,000 Annual Exempt Amount is applied, you are taxed on the remaining £4,000 in the 2023/2024 tax year, provided you made no other gains that year.

If you are a higher-rate taxpayer, this means you would pay £800 CGT.

However, the Annual Exempt Amount will halve again to £3,000 in April 2024. As a result, if you made the same sale in the 2024/2025 tax year, you would likely pay CGT on £7,000. So, a higher-rate taxpayer would pay £1,400.

Consequently, you may be more likely to pay CGT in the future, and the amount you are likely to pay may increase.

Consider how your own financial plan may be affected

It’s easy to let news stories about rising IHT receipts alarm you, but it’s important to consider your own financial plan and how you hold your wealth.

For instance, if you hold a lot of investments and you plan to sell them to fund your retirement, it may be equally important to consider CGT.

Conversely, if you hold a large portion of your wealth in cash, you may need to consider how you can pass it on to your family without a large IHT bill.

Ultimately, you and your family may be affected by both taxes, so it is important that you are prepared.

Get in touch

Working with a financial planner can help you find ways to manage your wealth more tax-efficiently.

Please contact us at or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, we’re a bona fide company providing excellent advice and high-quality service.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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