Capital Gains Tax on Death: What You Need To Know

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Many people understand that inheritance tax (IHT) may be due when someone dies, but far fewer appreciate that Capital Gains Tax (CGT) can also become relevant sometimes in surprising ways. While IHT is calculated based on the value of the estate, CGT relates to the increase in value of certain assets over time. Understanding how CGT works on death, and how it interacts with estate planning tools like deeds of variation, can help beneficiaries avoid unexpected tax bills.

At Step Legal Solicitors, our wills and probate team, headed by Shabana Khairi, frequently provide legal advice to families navigating the complexities of CGT following a loved one’s death in line with the Financial Services and Markets Act 2000 and SRA guidelines. In this article, we explain the circumstances where CGT may apply, how it is calculated and strategies that may mitigate liability. However, please note, we are not authorised to give ‘specific’ or personalised financial advice on any estate in question, and we endeavour you to reach out to a financial advisor to receive regulated guidance on CGT and post-death estates. 

How Capital Gains Tax Can Arise on Death

CGT is normally payable when an asset is sold or disposed of and has increased in value since it was acquired. However, when someone dies:

• Most assets pass to beneficiaries at “probate value” (the market value at the date of death).
• This “step-up” means that any unrealised gains before death are generally not taxed, so CGT is rarely payable at the point of death itself.

When CGT Does Arise

There are exceptions where CGT can be triggered, for example:

1. Disposal before death: If the deceased transferred an asset shortly before passing, any gain may become chargeable.
2. Assets not covered by the step-up rules: Certain types of gifts, trusts, or overseas assets may still attract CGT.
3. Beneficiary disposals after death: When a beneficiary sells an inherited asset, CGT is calculated from the probate value, not the original purchase price.

This last point is particularly important: while the estate itself rarely pays CGT, beneficiaries may face a liability when they sell inherited assets.

Deeds of Variation and Disclaimers: How They Can Affect CGT

A deed of variation is a legal document that allows beneficiaries to alter the distribution of an estate after someone dies. Similarly, a disclaimer allows a beneficiary to refuse an inheritance or gift.

When used correctly, these tools can also impact CGT:

• If a beneficiary receives an asset and immediately transfers it to another person under a deed of variation, they can retain the original probate value for CGT purposes.
• This means the gain does not crystallise, and the next beneficiary inherits the asset with the same “step-up” value.

Effectively, this can avoid CGT being charged on what might otherwise be a deemed disposal. Precise timing and legal drafting are essential to ensure the CGT benefit applies.

Worked Example with CGT Calculation

Scenario:

• Jane inherits a rental property from her late father.
• Original purchase price: £100,000
• Probate (market) value at date of death: £350,000
• Jane decides she does not want to keep the property and transfers it to her brother, Tom, under a deed of variation.

CGT Implications:

• Because the transfer is made under a deed of variation, Jane does not crystallise any gain. Tom inherits the property at the probate value of £350,000.
• If Tom later sells the property for £400,000, CGT is calculated as follows:

Step-by-Step CGT Calculation (2026 rates):

1. Sale price: £400,000
2. Probate value (base cost): £350,000
3. Gain: £400,000 – £350,000 = £50,000
4. Annual CGT allowance (2026/27): £6,000
   • Taxable gain: £50,000 – £6,000 = £44,000
5. Applicable rate:
   • For residential property, 18% if the individual is a basic-rate taxpayer, 28% if a higher-rate taxpayer.
   • Assuming Tom is a higher-rate taxpayer: 28% of £44,000 = £12,320 CGT due

Without the deed of variation, if Jane had been treated as disposing of the property herself at £350,000, she could have faced a CGT bill on the same £50,000 gain. By using the deed, the tax liability is deferred until the property is eventually sold by Tom and calculated from the step-up value, avoiding a double charge.

Planning Considerations

Even though CGT is rarely payable at the moment of death itself, there are several practical considerations for executors and beneficiaries:

• Keep accurate valuations of property, shares and other assets at the date of death, as these values form the CGT base for beneficiaries.
• Review inherited assets before selling: understanding the step-up and exemptions can prevent unnecessary tax bills.
• Consider deeds of variation if the estate plan could create tax efficiencies or if beneficiaries wish to redistribute assets.
• Trusts and certain gifts may trigger CGT differently, so specialist advice is essential.

Key Takeaways

• Many people focus solely on inheritance tax after a death, but CGT can also be relevant, particularly for beneficiaries selling inherited assets.
• The “step-up” to probate value means most gains accrued before death escape CGT, but care is needed if assets are transferred, sold, or placed in trusts.
• Tools like deeds of variation and disclaimers can be used strategically to avoid CGT crystallising when beneficiaries transfer inherited assets.
• Professional advice is essential: small errors in valuations, timing, or documentation can result in unexpected tax liabilities.

How We Can Help

Our wills and probate team here at Step Legal has extensive experience dealing with Inheritance Tax and Capital Gains Tax issues when administering a deceased estate. 

We can:

• Guide executors and administrators through asset valuations and basic CGT calculations
• Advise beneficiaries on potential tax liabilities when selling inherited assets
• Draft deeds of variation and disclaimers to optimise tax outcomes
• Ensure compliance with HMRC rules while protecting family interests

*All advice provided will be in line with guidelines set by the FCA. Please seek an independent financial advisor for personal, non-general financial advice. 

Death is a difficult time, and dealing with taxes on an estate adds another layer of complexity to the process. Expert legal guidance ensures the process is handled correctly, and that beneficiaries are not exposed to avoidable tax.

Contact us on 01782 651144 or email us via enquiries@steplegal.co.uk to talk one of our specialist solicitors today.