Do You Pay Capital Gains Tax on Shares You Inherit From Your Spouse?

You don't pay Capital Gains Tax when you inherit

There is no Capital Gains Tax charge when someone dies. Their shares aren't treated as sold, so no gain is worked out on their side and none passes to you.

You only pay tax if you later sell the shares and they have gone up in value since your spouse died. The spouse exemption you may have heard of is an Inheritance Tax rule. It doesn't change how Capital Gains Tax works on death. Rates and the allowance are in how Capital Gains Tax works.

Your cost is the value on the day of death

Shares you inherit from a spouse or civil partner are treated as if you acquired them on the date of death, at their market value that day. Market value means what the shares would have fetched on the open market. That figure is your cost, and it replaces what your spouse paid.

This is the opposite of what happens with a gift while you're both alive. Under the lifetime spouse rule, the person receiving the shares takes over the giver's original cost, so the growth since the purchase is taxed when they sell. On death, your cost resets to the value that day, so only growth after the date of death is taxed.

The value usually comes from the probate valuation, the estate's list of what the person owned and what it was worth on the day they died. Where an Inheritance Tax value has been worked out on death, that value is used for Capital Gains Tax too. When everything passes to a spouse, though, the estate is exempt from Inheritance Tax and nobody may have needed to value the shares. HMRC says the value then has to be worked out afresh when you need it for Capital Gains Tax. Ask the executors, the people dealing with the estate, what value they recorded, and keep it.

An example

Say your husband bought 1,000 shares in Company A for £10,000, including fees. On the day he died they were worth £16,000. Some time later you sell them all for £17,000. You're a higher rate taxpayer and you haven't used your allowance on anything else that tax year.

If he had given you the same shares while you were both alive, the sums would look different. You'd take over his £10,000 cost.

* Correct at the time of writing. Rates and allowances can change, so check HMRC's current Capital Gains Tax rates and tax-free allowance on GOV.UK.

Shares you already own

If you already hold the same shares, the inherited ones join your Section 104 pool, the single average cost HMRC uses for each holding. They go in at the value on the day of death, and the pool's average moves accordingly.

Say you're a higher rate taxpayer and owned 500 shares in Company A that cost you £5,000. You inherit another 500 worth £8,000 on the day of death. Your pool now holds 1,000 shares costing £13,000. Later you sell all 1,000 for £18,000.

* Correct at the time of writing. Rates and allowances can change, so check HMRC's current Capital Gains Tax rates and tax-free allowance on GOV.UK.

If the shares fall in value

Because your cost is the value at death, a sale for less than that value is a loss. You can claim it and set it against your gains. The loss is measured from the value at death, so a fall in value before your spouse died can't be claimed.

Reporting a sale, and what the estate does

You report a sale of inherited shares like any other, with the value at death as your cost. Our guide to the SA108 form shows where it goes. Keep the estate's valuation with your records, because it's the evidence for your cost.

Your spouse's own last tax year is dealt with separately, by the executors. The deceased's full tax-free allowance is available against their gains in the year of death. The executors get their own allowance for the rest of that tax year and the two after. If the executors sell shares before passing them to you, that sale is theirs to report. Your own allowance isn't affected.

When you need an adviser

Speak to a tax adviser or solicitor if the shares were held jointly. GOV.UK doesn't show how HMRC treats each half, so an adviser is the one to ask. The same goes if the estate is large, the shares are in a private company, or you or your spouse lived abroad. It also applies if the will leaves anything in a trust, meaning assets held by someone on another person's behalf. Get advice too before agreeing to change who inherits what. That is called a deed of variation, and it has its own Capital Gains Tax rules. If nobody can tell you the value at death, an adviser or the executors' solicitor can help you settle one.