The OTS report – Simplifying the Design of Inheritance Tax– Part 2


Sharon Collier

An experienced Chartered Tax Adviser and Trust and Estate Practitioner, Sharon joined ETC Tax in September 2016.

On 4 July 2019 the Office for Tax Simplification published its second report “Simplifying the Design of Inheritance Tax.”

My recent article considered the first key area identified within the report – lifetime gifts.

Key Area 2–Interaction with Capital Gains Tax (“CGT”).

In this second article I will consider Key Area 2– the Interaction of IHT with Capital Gains Tax (“CGT”).

At a theoretical level, IHT and CGT are quite different and underpinned by distinct policy rationales.

CGT is charged on the increase in the value of an asset during a persons period of ownership (the gain), whereas IHT is generally levied by reference to the total value of assets transferred.

Despite this there is, of course, a high degree of practical overlap between CGT and IHT. Many of the assets on which CGT is charged also potentially attract IHT.

CGT however is not currently levied on death. CGT exemption on death is intended to reflect the impact of IHT. However, the current regime is not perfect, with some situations where there is no IHT or CGT and other situations where there is both CGT and IHT.

The Capital Gains Tax position on death

When someone inherits assets, the acquisition value of the assets for CGT purposes is the market value of those assets on the date of death. Any previous gains are wiped out. This is known as the ‘capital gains uplift’ on death. The capital gains uplift applies to all capital assets, including business property, farms, residential property, shares and other investments held at death.

The Capital Gains Tax position on lifetime gifts

There is no similar uplift for lifetime gifts, although many lifetime gifts can be made without triggering an immediate CGT charge due to gift holdover relief.

Gift holdover effectively means that the recipient is treated as acquiring the asset at the donor’s historic acquisition cost and no gains will arise until a subsequent disposal of the asset.

The impact of the current regime

The OTS has heard from numerous advisers that the capital gains uplift on death distorts decision making relating to assets that benefit from an exemption from Inheritance Tax. Where a client holds such an asset that has risen in value, and is considering transferring it during life, they are often advised to retain it until death because of the tax benefits. It distorts decisions on the succession of businesses and farms which qualify for APR or BPR. Where such an asset is retained until death, any potential capital gains are wiped out and there is no IHT to pay.

A similar issue arises where the IHT spouse exemption applies. The capital gains uplift can apply when assets are transferred on death and are covered by the spouse exemption so that capital gains are wiped out and no Inheritance Tax is paid.

However, lifetime transfers between spouses do not benefit from the capital gains uplift. This can also distort the decisions couples make about the timing of asset sales.

It is possible for a farm or business to be exempt from Inheritance Tax on death and sold immediately thereafter with no Capital Gains Tax payable either.

Some advisers suggested that it would simplify decision making around succession if there were no capital gains uplift for assets that are not subject to Inheritance Tax. Individuals would be able to focus on when the time is right to pass on their assets without being influenced by the capital gains uplift.


One option that has been considered to remove the distortion is replacing the capital gains uplift with a ‘no gain, no loss’ transfer for certain assets. A ‘no gain, no loss’ transfer means that there would be no capital gains uplift (but nor would capital gains be immediately payable upon death).

Those to whom for example a business passes on death would instead acquire it at the historic base cost of the person who died.

This would bring the treatment of transfers on death in line with holdover relief available in respect of lifetime gifts. Consistency of treatment in life and on death would eliminate the distortion caused by the capital gains uplift.

This is not necessarily a perfect or simple solution and there are areas which would require further consideration.

One area which would require careful consideration is where a proportion of the estate is inherited by a spouse or civil partner without individual assets being identified. In this situation, there can be a choice of which assets pass to which beneficiaries and the legislation would need to ensure that all assets passing to a spouse or civil partner do so at a ‘no gain no loss’ value.

Another area for consideration would be where an asset is not given full relief from Inheritance Tax, or where it is transferred to two beneficiaries, one of whom is exempt and the other is not. In such cases, consideration would need to be given as to how a no gain, no loss transfer would apply. What proportion of the value would receive a capital gains uplift? This could raise some tricky valuation issues.

Recommendation 5

Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.


The OTS has received three suggestions of ways to implement the above in an equitable manner without creating unnecessary complexity :

  • the proportion of an asset that does not qualify for IHT relief is used to determine the proportion of the gain on any eventual disposal that would not be subject to Capital Gains Tax, or
  • where an asset is bequeathed partly to an exempt beneficiary and partly to a chargeable one, only the fractional interest received by the exempt beneficiary would receive no gain, no loss treatment
  • a monetary amount could be added to the base cost of the asset, calculated by reference to the value in respect of which IHT is payable


Should you or your clients require assistance in relation to any aspect of IHT please do not hesitate to contact us.



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