Capital Taxes, Trusts and Estates: CGT, IHT and Trust Taxation
Capital gains tax
CGT applies to chargeable disposals by chargeable persons. Take consideration, deduct allowable expenditure (acquisition, enhancement, incidental costs), apply reliefs (private residence relief, holdover, business asset disposal relief, rollover), deduct the annual exempt amount (3,000), then tax at the current 18% and 24% rates. Core mechanics to know: the share identification rules (same day, then 30 days, then the section 104 pool), connected person disposals at market value, part disposal fraction A over A plus B, chattels (6,000 exemption and the 5/3 rule), and the allocation of the annual exempt amount to minimise tax.
Inheritance tax
IHT bites on the diminution in value of the estate. Lifetime transfers are exempt (spouse, charity, annual 3,000, small gifts 250), potentially exempt transfers (which fail if death occurs within seven years), or chargeable lifetime transfers (taxed at lifetime rates with seven-year cumulation). On death: nil rate band 325,000, residence nil rate band 175,000 tapered by 1 for every 2 above a 2m estate and only where the home passes to descendants, both transferable between spouses. Taper relief reduces tax on failed lifetime transfers, not the rate itself; the 36% rate applies where 10% of the baseline amount goes to charity.
Trusts and estates
Bare trusts are taxed on the beneficiary; interest in possession trusts on the life tenant; discretionary trusts under the relevant property regime with 10-year anniversary and exit charges. On death, assets are revalued to probate value for CGT, so no gain arises on death itself.
Traps
Treating a PET as using nil rate band when it did not fail; confusing taper relief with the annual exemption; ignoring the probate uplift; and claiming the residence nil rate band without applying the 2m taper.