Capital Tax Planning

CGT planning starts with the BASICS — using allowances and shifting income between spouses. These simple steps often yield significant savings.

Annual Exempt Amount (AEA):

• £3,000 for 2024/25 (reduced from £6,000 in 2023/24, £12,300 before)
• USE IT OR LOSE IT — cannot carry forward
• Trust AEA is £1,500 (half of individual)
• Deduct AEA from HIGHEST-RATE gains first (e.g., residential property at 24% before shares at 20%)

Planning:

• Spread disposals across tax years to use multiple AEAs
• Consider partial disposals each year to capture AEA annually
• Inter-spouse transfer at no gain/no loss to use TWO AEAs (£6,000 combined)

Loss planning:

• Capital losses OFFSET capital gains in the SAME tax year
• Then carry forward indefinitely (against future gains only, not income)
• BUT: losses against the same year's gains MUST be used first (can't save AEA while losses carry forward)
• Current-year losses are applied BEFORE AEA — may result in "wasted" AEA

Strategic considerations:

• In a year with gains only: realise small losses INTENTIONALLY (from worthless shares, negligible value claims) to offset gains
• In a year with losses only: DEFER gains into future years to use the carry-forward losses + future AEAs
• "Bed and breakfasting" (selling and repurchasing within 30 days): PREVENTED by share matching rules — the repurchase cancels the loss for that quantity
• But can "bed and spouse" (sell, have spouse repurchase): different person, not caught by 30-day rule — a legitimate strategy

Share loss relief against INCOME (s.131 ITA 2007):

• Losses on SUBSCRIBED shares (not purchased second-hand) in an UNLISTED TRADING company can be set against INCOME of the current or previous tax year
• Relief at marginal income tax rate (up to 45%) — MUCH more valuable than CGT relief (20%)
• EIS shares automatically qualify
• Negligible value claim: if shares have become worthless, claim s.24 TCGA for deemed disposal, creating a loss; then elect s.131 to use the loss against income

Inter-spouse transfers:

• Transfers between cohabiting spouses at NO GAIN / NO LOSS
• Receiving spouse inherits the base cost
• Can plan BEFORE DISPOSAL to shift assets to the spouse with: unused AEA; lower CGT rate; unused losses; BADR headroom

Worked example — CGT optimisation with spouse:

Dan (additional-rate taxpayer, higher CGT rate) is selling shares for £80,000 gain. His wife Anna (basic-rate, no other income) has full AEA unused.

Without planning: Dan's gain £80,000 − AEA £3,000 = £77,000 × 20% = £15,400.

With planning: Before sale, Dan transfers 50% of shares to Anna (at no gain/no loss).

• Dan's half: £40,000 gain − AEA £3,000 = £37,000 × 20% = £7,400
• Anna's half: £40,000 gain − AEA £3,000 = £37,000. Tax: basic-rate band £37,700 available. She pays 10% (general rate) on £37,000 = £3,700 (most/all in BRB).
• Combined: £7,400 + £3,700 = £11,100
• Saving: £4,300 (28%)

Key constraints:

• Transfer must be GENUINE — beneficial ownership, not token
• Timing: transfer must be DATED before the disposal
• For BADR: transferee needs 2-year ownership — last-minute transfers don't qualify for BADR on shares (unless shares were always jointly owned for 2+ years)

PPR relief can provide FULL CGT exemption on main residence. Planning opportunities:

Main residence election (for multiple residences):

• An individual with more than one residence can ELECT which is their main residence
• Election within 2 years of acquiring the second property
• Can be VARIED (flip) subsequently — no time limit on varying
• If no election made: HMRC determines based on facts (usually location of family/work)

"Flipping" strategy:

• Elect Property A as main residence (even for a brief period); this creates the LAST 9 MONTHS exemption for A when eventually sold
• Then flip election to Property B — generates final-period exemption for B too
• Can be used to get the 9-month automatic relief on both properties (over time)
• Originally could secure 18 months (pre-April 2020) — now reduced to 9 months
• Careful: HMRC may challenge if the election is transparently tax-motivated without genuine residence

Deemed occupation rules (recap from CGT Advanced):

Strategic considerations:

• For a property LET during ownership: only the last 9 months are exempt by default
• To maximise PPR: PHYSICALLY MOVE INTO the property at some point (even briefly), then use deemed occupation rules for other periods
• For international workers: overseas employment gives NO LIMIT deemed occupation — plan carefully
• Be aware: letting relief has been restricted since April 2020 — only applies if owner SHARED occupation with tenant. Rarely available in commercial lets.

Job-related accommodation exception:

• If an individual must live in job-provided accommodation (armed forces, ministers of religion, publicans, caretakers), their owned home can still qualify as main residence during that period
• Useful for military personnel maintaining a civilian home while stationed overseas

Worked example — flipping election:

Nadia owns two properties:

• Property A (bought 2015, £300,000, now worth £600,000) — let to tenants since 2015
• Property B (bought 2020, £400,000, her actual residence)

Without planning: A is investment, fully chargeable. B is exempt. If she sells A: gain £300,000, taxable at 24% = £72,000 (simplified).

With planning (elect A as main residence briefly):

1. Move into Property A temporarily (1-2 months) — establishing it as a residence
2. Elect Property A as main residence for that period
3. Then re-elect Property B (or vary election)
4. On sale of A (2025): final 9 months automatically exempt. Some period of occupation also exempt.
5. Calculation: 9 months / 10 years total ownership = 7.5% of gain exempt + actual occupation period
6. Saves £300,000 × 7.5% × 24% = £5,400 (before considering actual occupation period)

Risk: HMRC challenges "quality" of residence. Brief presence without genuine home-making may fail the test. Courts have rejected token occupations. The election must reflect genuine residence.

Planning with gardens and grounds:

• PPR relief includes garden/grounds up to 0.5 HECTARES automatically
• Larger grounds: relief only if required for "reasonable enjoyment" (judicial test)
• If selling land only (no dwelling): PPR does not apply — taxable as separate asset. Must sell house WITH surplus land for PPR on the whole.
• Development value on garden land: ensure sale includes house + garden in one transaction

Business Asset Disposal Relief (BADR):

• 10% CGT rate; £1m LIFETIME limit
• Need to meet ALL conditions throughout 2 years ending with the disposal

Conditions checklist for personal company shares:

• At least 5% of ordinary shares
• At least 5% of voting rights
• Either 5% profits/assets OR 5% economic interest on disposal
• Officer or employee of the company
• Trading company (or holding company of trading group)
• Held throughout 2 years ending with disposal

Common planning issues:

1. Changing shareholding structure:

• If your shareholding drops below 5% (e.g., dilution by new share issue): potential "BADR dilution election" to treat the shares as disposed of at that date (locking in BADR), then reacquired at MV. Defers tax but preserves relief.
• Plan before issue of new shares that would dilute — decide whether to elect

2. Spouse shareholding:

• Each spouse has SEPARATE £1m BADR lifetime limit
• Plan ahead: transfer some shares to spouse early (at no gain/no loss) so BOTH meet the 5% / 2-year / officer conditions
• If both qualify: couple can use £2m total BADR. Significant saving at exit (10% vs 20% = 10% × £1m additional = £100,000).
• Caution: transferee spouse must meet ALL conditions independently for their own 2 years

3. Associated disposals:

• Personally-owned assets used by business (e.g., landlord owns premises used by own company)
• Must be disposed of alongside a material disposal (shares or business interest)
• BADR available only on the BUSINESS-USE portion
• RESTRICTED if rent was received — proportion of time rent paid reduces relief
• Planning: consider charging NO rent (or a minimal rent) to qualify more fully — but be wary of "excess" being transfer pricing issue

4. Disposal of business assets after cessation:

• BADR available on business assets sold WITHIN 3 YEARS of ceasing trade
• Plan timing carefully — DON'T delay sale beyond 3 years post-cessation

Investors' Relief (IR):

• 10% CGT rate; SEPARATE £10m lifetime limit (in addition to BADR)
• Requirements different from BADR:
  • Unlisted trading company ordinary shares
  • SUBSCRIBED for (not purchased second-hand); issued on or after 17 March 2016
  • Held continuously for at least 3 years
  • Investor NOT an officer or employee (nor connected with any officer/employee) during the holding period
• Designed for PASSIVE EXTERNAL INVESTORS — distinct from BADR (owner-managers)
• Combined BADR + IR: up to £11m at 10% CGT rate over a lifetime

Rollover Relief (s.152) planning:

• Gain on business asset deferred by reinvestment in replacement asset
• Window: 1 year before or 3 years after disposal
• Full relief if full reinvestment; partial if part only
• Planning: CHOOSE the best new asset for rollover purposes — land and buildings, fixed P&M, goodwill
• Could combine: sell Old Warehouse, buy New Factory, rollover relief defers the gain. Gain crystallises when New Factory sold.

Gift Relief (s.165) planning:

• Gift of business asset or unlisted trading company shares
• Joint election; recipient inherits donor's base cost
• Effectively defers the CGT charge — recipient pays CGT on ultimate sale
• USEFUL for passing business to next generation while donor is alive
• Combine with IHT: gift is a PET (exempt if donor survives 7 years). So: CGT deferred via gift relief; IHT mitigated via PET. Significant planning opportunity.

Incorporation Relief (s.162):

• AUTOMATIC on transfer of whole business as going concern to a company in exchange for shares
• Gain on transferred business assets rolls into the shares received
• Can elect OUT if beneficial
• Partial relief if part of consideration is cash (taxable pro rata)

Choice between gift relief and incorporation relief:

• Incorporating sole trader business to company: AUTOMATIC s.162 relief
• Could elect OUT of s.162 and use s.165 gift relief instead — allows ONE-OFF gain realisation (e.g., for BADR lifetime limit use before company ownership starts)

The 7-year rule:

• PET (Potentially Exempt Transfer): gift to individual or absolute trust. Exempt when made. Escapes IHT if donor survives 7 years.
• CLT (Chargeable Lifetime Transfer): gift to most trusts. Immediately chargeable at 20% above NRB; reconsidered if donor dies within 7 years.
• Taper relief: reduces IHT (not transfer value) for deaths 3-7 years after gift: 0%/20%/40%/60%/80% relief on tax

Strategic lifetime giving:

1. Give assets likely to GROW:

• Gift assets that will appreciate (shares in growing company, speculative investments)
• Future growth is outside the donor's estate (from moment of gift)
• Assets already declining or stagnant: less urgent to gift

2. Use annual exemptions CONSISTENTLY:

• £3,000 annual IHT exemption — PLUS one-year carry forward (if unused), giving up to £6,000 total
• Over 10 years of consistent use: £30,000-£60,000 moved out of the estate tax-free (plus inherent appreciation)
• Small gifts exemption: £250 per recipient per year (unlimited recipients)

3. Normal expenditure out of income:

• EXEMPT from IHT — UNLIMITED amount
• Conditions: regular pattern of gifting FROM INCOME (not capital); donor maintains standard of living
• Example: regular annual gifts to children or grandchildren funded from pension income or investment income
• Keep records (income vs gifts) to substantiate the claim at death
• Among the most UNDER-UTILISED exemptions — can shift significant wealth over time

4. Marriage gifts:

• £5,000 (parent to child), £2,500 (grandparent to grandchild), £1,000 (others)
• Must be in contemplation of marriage/civil partnership and conditional on it occurring
• Can combine with annual exemption

5. Large gifts as PETs:

• Outright gift to individual = PET
• SURVIVE 7 YEARS → fully escapes IHT
• Best done EARLY while donor is relatively young and healthy
• Consider life insurance to cover potential IHT if donor dies within 7 years

6. Gifts to charity:

• Unlimited exemption during lifetime AND at death
• Leaving 10%+ of net estate to charity reduces remaining IHT rate from 40% to 36%
• Gift Aid: also reduces donor's income tax (and extends BRB/HRB) — triple benefit

Order of lifetime gifts (optimise NRB):

• Cumulation rule: 7-year window of previous chargeable transfers reduces NRB available
• Make CLTs BEFORE PETs: if PET fails and becomes chargeable after death, it uses NRB after the CLT has already used some
• Actually: the ORDER doesn't really matter under HMRC rules because on death, all failed PETs are re-examined with their own NRB availability. But timing matters for the 7-year clock

Gifts with reservation of benefit (GROB):

• If donor gives away an asset BUT RETAINS A BENEFIT (e.g., gives house to children but continues living there rent-free): the asset is STILL IN THEIR ESTATE for IHT
• Anti-avoidance rule — prevents "paper" gifts that are really just for show
• Pre-Owned Asset Tax (POAT): alternative income tax charge if GROB rules don't apply
• To avoid GROB: donor must truly separate from the asset — e.g., pay full market rent to children for continued occupation; or move out entirely

Insurance as IHT planning:

• Life insurance IN TRUST: proceeds paid to trust on death, outside the estate for IHT — provides liquidity for beneficiaries to pay IHT
• "7-year term insurance" to cover potential IHT on failed PETs — cover gradually reduces as PET ages
• Whole-of-life policies in trust: IHT-efficient way to pass wealth to next generation

Worked example — lifetime giving strategy:

Margaret (age 65), widowed, estate £2m. Concerned about IHT. Children already financially successful; grandchildren aged 5-15 could benefit.

Current position: If Margaret dies now with £2m estate: NRB £325k + transferred NRB £325k + RNRB £175k + transferred RNRB £175k = £1m tax-free. Taxable £1m × 40% = £400,000.

Lifetime plan over 10 years:

• Annual exemption £3,000 × 10 years = £30,000 to grandchildren (each year)
• Normal expenditure out of income: £10,000/year (from her pension and investments) to grandchildren, funded from income = £100,000 over 10 years
• Large PET: £500,000 to a discretionary family trust (as a CLT) or to the children outright (as PET). If PET and Margaret survives 7 years: escapes IHT entirely.
• Marriage gifts if grandchildren marry: £2,500 each
• Charitable bequest in will: £100,000 (to meet 10% threshold for 36% reduced rate)

Expected outcome:

• Annual exemptions: £30,000 out of estate (no IHT)
• Normal expenditure: £100,000 out of estate (no IHT)
• £500,000 PET: if Margaret survives 7 years, fully escapes (saves £200,000 IHT)
• RNRB preserved (estate now £1.3m — below £2m threshold for tapering)
• Charitable legacy: reduces rate on residue to 36%
• Total IHT reduction: approximately £200,000-£300,000 depending on survival

A trust is a legal arrangement where TRUSTEES hold assets for BENEFICIARIES under a deed of trust. Trusts can be useful for tax planning, asset protection, and control. The tax rules are complex.

Types of trust:

Uses of trusts:

1. Lifetime IHT planning:

• Discretionary trust: entry charge 20% on excess over NRB (if CLT) — but subsequent 10-yearly charges up to 6% (typically 3-4% in practice) CAP IHT at much less than 40%
• For large estates: a trust caps IHT at ~3-4% per decade, vs 40% at each death
• Good for families wanting flexibility (trustees decide who benefits)

2. Control and protection:

• Trustees control use — prevents a young or vulnerable beneficiary from mismanaging assets
• Protects assets from divorce, bankruptcy, creditor claims of the beneficiary
• Useful for assets passed to children (held until they reach maturity)

3. Multi-generational planning:

• Assets stay in trust across generations
• Subject to periodic charges but avoids 40% at each beneficiary's death
• Favoured by dynastic families

Tax charges on trusts:

Trust income tax:

• Discretionary trusts: standard rate band £1,000 (basic rate); above that 45% on non-savings/savings, 39.35% on dividends
• Interest in possession (life interest): taxed on BENEFICIARY (they have entitlement to income)
• Bare trust: income taxed on beneficiary directly

Trust CGT:

• Trust AEA: £1,500 (half of individual)
• CGT rate: 10%/20% (BADR available), 18%/24% (residential)
• Holdover relief available on transfers in (if IHT is a CLT — the gain can be held over)

Planning considerations:

• Complex tax treatment — compliance costs significant
• For SMALL estates (under NRB × 2): trusts rarely justify the complexity
• For LARGE estates (multiple £m): trust structures can save significant IHT across generations
• International element: non-UK trusts have different rules (being reformed with the April 2025 non-dom changes)

Note on settlement rules (covered in Personal Tax Planning):

• Income from assets settled by parents for minor children is taxed on the PARENT (if > £100/year)
• Even using a discretionary trust doesn't avoid this settlement rule
• Grandparent settlements NOT caught — useful planning for grandchildren

BPR and APR offer 100% relief on qualifying business/agricultural property. Effective planning can bring entire estates outside IHT.

Key BPR planning strategies:

1. Hold qualifying assets personally:

• Unquoted trading company shares: 100% BPR
• Business/partnership interest: 100% BPR
• Quoted controlling shares (> 50%): 50% BPR
• Assets used by own business: 50% BPR

2. Maintain trading status:

• Company must be WHOLLY OR MAINLY trading (not investment)
• Property investment generally fails; but furnished holiday lettings may qualify (case law mixed)
• Keep investment assets BELOW 50% of company value and activities
• Watch for "cash-rich" companies accumulating excess cash — may fail trading test; also excepted assets if not required for business

3. Managing excepted assets:

• Specific assets within a qualifying business that are NOT used wholly/mainly for business
• Examples: investment property held by trading company; excessive cash beyond operational needs
• Solution: remove excepted assets from the qualifying company before death (dividend out; sale)
• Or: use them genuinely for business needs

4. 2-year ownership requirement:

• Must own qualifying property for 2 years
• Replacement property: can combine ownership periods (old replaced by new; total 2+ years across both)
• Spouse transfer: surviving spouse inherits the first spouse's ownership period (if spouse transfer on death)
• Plan acquisitions early — if acquiring a business in old age, may not qualify for BPR before death

5. Clawback on failed PETs:

• If a lifetime gift of business property FAILED (donor died within 7 years), BPR clawback applies UNLESS:
  • Donee STILL OWNS the property at donor's death (or qualifying replacement), AND
  • Property STILL QUALIFIES for BPR (still trading, etc.)
• Planning: donee should KEEP the gifted assets as qualifying until at least 7 years after donor's gift
• If donee wants to sell: reinvest proceeds in qualifying replacement within 3 years to preserve BPR

Worked example — BPR planning:

George, age 70, estate £5m including: trading company shares £3m (qualifying BPR); residential home £1.5m; investments/cash £500k. Wife died earlier (spouse exemption used full transfer of NRB and RNRB).

Current IHT position (if dies today):

• Gross estate £5,000,000
• Less BPR on trading shares: £3,000,000
• Chargeable estate: £2,000,000
• NRB + transferred: £650,000
• RNRB + transferred (but tapered: estate £5m well above £2m threshold; RNRB fully lost for estates > £2.35m effective limit... actually £2m tapered by £1 per £2 so lost at £2.35m for single; with transferred, lost at different threshold)
• Actually: RNRB combined £350k; taper reduces it at estate > £2m. (£5m − £2m) / 2 = £1.5m reduction. £350k − £1.5m = negative → £0 RNRB.
• Taxable: £2,000,000 − £650,000 = £1,350,000 × 40% = £540,000 IHT

Planning opportunities:

1. BPR is ALREADY CLAIMED (automatic) — so trading shares already excluded
2. ESTATE VALUE FOR RNRB TAPER: check if reducing non-business estate helps restore RNRB
   • For RNRB taper: "estate on death" INCLUDES BPR-relieved assets (not the relieved VALUE — the full asset value is included in the taper test)
   • So gross estate £5m for taper purposes — cannot restore RNRB through BPR alone
3. Lifetime gifting of NON-BPR assets: reduce investments/cash balance below £2m threshold
   • Give £500k investments to children as PET. If George survives 7 years: fully out of estate.
   • Estate for taper: £4.5m. Still well above £2m. Hasn't restored RNRB.
4. Restructure: could move some value INTO the trading company to increase BPR amount and reduce non-BPR estate — but affects "excepted assets" rules

Note: RNRB taper for large estates: once gross estate > £2m, RNRB begins to taper. Fully lost at £2.35m (single) or £2.7m (with full transferred RNRB). BPR does NOT help with this taper — it's a gross estate test. Large-estate planning often involves lifetime gifting to reduce below the taper threshold.

APR planning:

• APR: 100% for owner-occupied or modern tenancies; 50% for pre-Sept 1995 tenancies
• Ownership: 2 years owner-occupied; 7 years let
• Plan EARLY: buying agricultural land close to death may not qualify for APR
• Farmhouses must be "character appropriate" to the farmland
• Development value: APR only relieves agricultural value; development uplift may need BPR (if qualifying) or is chargeable

A will determines how assets pass on death. Well-drafted wills can minimise IHT and maximise family benefit.

Key will planning elements:

1. Spouse exemption:

• Unlimited spouse/civil partner exemption on death
• Transfer unused NRB and RNRB to surviving spouse (automatic, claim required)
• Simple "all to spouse" will defers all IHT until second death, using both NRBs/RNRBs eventually

2. Nil Rate Band (NRB) discretionary trust — historically valuable:

• Put an amount equal to NRB into a discretionary trust at first death (trust for spouse + family)
• Historically: this "banked" the first spouse's NRB before NRB was transferable
• Since transferable NRB (2007): less valuable as simple mechanism
• BUT: STILL USEFUL if value likely to grow (NRB in trust freezes value; growth in trust benefits family without increasing surviving spouse's estate)
• Also useful for: asset protection for surviving spouse; control if spouse remarries

3. Residence Nil Rate Band (RNRB):

• £175,000 per spouse (transferable) for residence passed to direct descendants
• Will must clearly leave the residence to direct descendants (children, grandchildren, spouse of such)
• If will leaves residence into a DISCRETIONARY TRUST (with mixed beneficiaries): may fail RNRB test
• Solution: use a SPECIFIC GIFT of residence to descendants, OR an Immediate Post-Death Interest (IPDI) to spouse/descendants

4. Charitable legacy for 36% rate:

• Leave 10%+ of "net estate" to charity → IHT rate on remainder REDUCES from 40% to 36%
• Net estate = chargeable estate after NRB, RNRB, reliefs (but excluding charitable legacy itself)
• 10% test: is the charitable legacy ≥ 10% of the "baseline"?
• Often INCREASES the charitable amount saves tax overall (math favours 10%)

5. Balanced portfolio for BPR/APR:

• If testator holds assets qualifying for BPR, ensure the will passes them in a way that preserves relief
• BPR applied BEFORE NRB — waste of NRB if BPR assets consume it
• Optimal: leave BPR assets to non-spouse (uses BPR); leave other assets to spouse (spouse exemption); preserves NRB for future use

6. Flexible structures:

• Include DEED OF VARIATION provisions (executors empowered to vary if family circumstances change)
• Consider LETTER OF WISHES for discretionary trusts
• Life interest trusts for surviving spouse: spouse gets income; capital eventually to children

Deeds of variation:

• Legal document signed within 2 YEARS of death, varying the will's dispositions
• Must be signed by ALL affected beneficiaries
• Contain specific tax election
• Treated as if the DECEASED had made the new arrangement — both for IHT and CGT
• NOT a PET by the original beneficiary (major advantage)

Use cases:

1. Skipping a generation: Child inherits but doesn't need the money; redirects to their own children (testator's grandchildren). Avoids child's estate building up; gives to younger generation now. Very common.
2. Equalising estates: If one spouse's will left too much outside UK residence, vary to use spouse exemption or optimise NRB
3. Creating or dissolving trusts: Vary a will to put inheritance into a trust (or out of a trust) for tax reasons
4. Utilising reliefs: If will didn't optimise BPR or charitable rate, vary to do so

Practical example:

Testator leaves £1m to son Tom, who is wealthy (already at IHT exposure). Tom executes deed of variation within 2 years, redirecting the £1m to his children. For IHT: treated as if testator had left it to grandchildren directly. Tom's estate is unaffected — avoids growth from £1m inheritance. Grandchildren receive now, possibly at younger ages with more time to grow.

Limitations of deeds of variation:

• Must be WITHIN 2 YEARS of death
• Must not receive CONSIDERATION from the new beneficiary
• Cannot be used for stamp duty purposes (only IHT/CGT)
• HMRC scrutinises to ensure genuine rearrangement

CGT and IHT interact at several points — understanding the interaction enables optimal planning.

On death:

• NO CGT — death is NOT a disposal. All unrealised gains are WASHED OUT (step-up to market value at death).
• IHT applies to full market value of the estate
• Beneficiaries' base cost = MV at death — no CGT when they eventually sell (subject to subsequent appreciation)

Implications:

• Holding appreciated assets UNTIL DEATH: saves CGT (step-up); pays IHT (40%)
• Gifting during lifetime: may trigger CGT now; PET for IHT (exempt if survive 7 years)
• Trade-off: CGT now at 10-24% vs IHT later at 40%. Often IHT later = higher tax than CGT now.

Lifetime gift scenarios:

Gift relief + PET COMBINATION:

• Gift business assets to children: joint election for gift relief (CGT deferred). Gift is also PET for IHT.
• If donor survives 7 years: NO IHT (PET succeeded). CGT still deferred until children sell.
• If donor dies within 7 years: PET fails, IHT on the gift (but BPR often available to cover if conditions met). CGT still deferred.
• This is POWERFUL — transfers wealth with tax deferred on both axes.

Worked example — CGT vs IHT decision:

Asset value £500,000, base cost £100,000 (gain £400,000). Donor is higher-rate (CGT 20% general; 24% residential).

Option 1: Hold until death.

• CGT: £0 (step-up)
• IHT: £500,000 × 40% = £200,000
• Total tax: £200,000

Option 2: Lifetime gift (PET), donor survives 7 years.

• CGT on gift: £400,000 × 20% = £80,000 (AEA ignored for simplicity)
• IHT: £0 (PET escapes)
• Total tax: £80,000

Option 3: Lifetime gift with gift relief (if business asset), donor survives 7 years.

• CGT deferred: £0 now, £400,000 × 20% = £80,000 when child eventually sells (may be years/decades later)
• IHT: £0 (PET)
• Current tax: £0; future tax when child sells: up to £80,000 (if child still higher rate)

Option 4: Lifetime gift, donor dies within 7 years (BPR not applicable).

• CGT on gift: £80,000 (paid by donor at gift date; deferred if gift relief)
• IHT: £500,000 × 40% × taper reduction (varies 0-80% depending on years)
• Worst case (died in year 1): IHT ~£200,000 on top of CGT £80,000 = £280,000
• Best case (died year 6): IHT £200,000 × 20% = £40,000 + CGT £80,000 = £120,000

Key insight: Lifetime gifting is usually advantageous IF donor survives 7 years (achieves PET exemption). The CGT cost (20% typically) is LOWER than the IHT (40%). Use gift relief where available to defer CGT.

Special scenarios:

• Main residence: holding until death preserves PPR relief on FULL VALUE at death (no CGT even if let for years). Gift during lifetime loses PPR for the later-owned period. Strongly favours holding.
• Depreciating assets: no "gain" to defer; gift immediately (no CGT) — just a PET for IHT purposes.
• Unlisted trading company shares (< 5%): NO gift relief available (doesn't qualify as personal company). But: 100% BPR means IHT-free on death. DIFFERENT calculation — probably hold until death.

Pre-2026 non-dom transition (from April 2025): IHT becomes residence-based (10 of 20 years UK → worldwide in scope). Non-doms previously planning to hold offshore assets to avoid UK IHT must restructure. Planning considerations:

• Consider departing UK before 10-year threshold met (if feasible)
• Trusts established before 2025 may have transitional protection — seek advice
• Non-UK settled property ("excluded property") rules changing